National Pension Scheme: Eligibility, Tax Benefits, Online Procedure

Updated on : Jan. 13, 2023 - noon 17 min read.

Investing in your future is a wise decision, and contributing in National Pension Scheme (NPS) is a reliable way to secure your retirement. The NPS is a government-backed initiative designed to provide a stable and sustainable source of income for individuals after they retire. With its flexible contribution options and tax benefits, the NPS has become a popular choice for savvy investors across India. But navigating the world of NPS can be tricky, with complex rules and regulations that can be overwhelming for the uninitiated. This comprehensive guide is designed to help you understand the ins and outs of the National Pension Scheme and make informed decisions about your retirement planning. Whether you're a young professional just starting out or a seasoned investor looking to diversify your portfolio, this guide will equip you with the knowledge and tools you need to make the most of the NPS and secure a comfortable retirement.

The National Pension System is a social security initiative by the Central Government. This pension program is open to employees from the public, private, and even the unorganized sectors except those from the armed forces.

The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a particular corpus. As an NPS account holder, you will receive the remaining monthly pension post your retirement.

Earlier, the NPS scheme covered only Central Government employees. Central Government employees joining on or after 01-01- 2004 are mandatorily covered under the NPS. Now, however, the PFRDA has made it open to all Indian citizens on a voluntary basis.

The NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement.

Eligibility for National Pension Scheme

Should be an Indian citizen (resident or non-resident) or an Overseas citizen of India (OCI).
Should be aged between 18 – 70 years.
Should comply with the Know Your Customer (KYC) norms detailed in the application form.
Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
Employees from the public, private, and even unorganized sectors except those from the armed forces.

Who Should Invest In NPS?

If you are a salaried individual and are looking for a plan that will help you save regularly for your retirement then you can consider investing in NPS.

This is an even more important investment for the people who are working in private firms where there is no pension. NPS will help you create a regular pension after retirement. You can also take advantage of tax benefits under Section 80C.

Types of NPS Accounts

1. Tier 1 NPS Account

Tier I is a retirement account. On opening a Tier I NPS account, you are allotted a 12-digit permanent retirement account number (PRAN). You can open this account with a minimum contribution of Rs 500. However, to keep the account active, you need to contribute at least Rs 1,000 in a financial year.

There is no cap on the maximum investment you can make to your Tier I account. The money you invest in this account is locked until you turn 60. On turning 60, you can withdraw 60% of the corpus as a lump sum. You must use the balance of 40% of the corpus to buy an annuity plan from an insurance company that will pay you a monthly pension.

Under Section 80CCD of the Income Tax Act 1961, the investments you make to your Tier I NPS account qualify for tax exemption.

2. Tier 2 NPS Account

Tier II accounts are permitted only if you already have a Tier I account. This voluntary account can be opened by making a minimum deposit of Rs 1,000. Later, you can contribute any amount that you wish to.

One significant factor differentiating Tier II accounts is that the investments made in Tier II accounts do not enjoy any exemption. You do not get any tax exemption benefits from your Tier II account investments.

How to Open an NPS Account?

You can open your NPS account both online as well as offline following the processes and documents are given below:

Follow the below steps to open your NPS account online

Visit the official NPS website. Click on the 'Registration' tab and select 'Individual.'

Fill in your Aadhaar card/PAN card number. On doing so, you will receive a one-time password (OTP) on your registered mobile number.

Enter the OTP and click on the 'Continue' button. An acknowledgment will be sent to the number with your name. Click on 'OK.'
You will be redirected to a new page. Fill in your details and then click 'Save and Proceed.' Next, you are required to select your asset allocation - Auto or Active. After you have chosen the option, fill in the nominee details.
Post that, upload a canceled cheque from your bank account and your specimen signature.
Lastly, you need to pay a minimum of INR 500. On making a successful payment via net banking, you will receive your PRAN number and the payment receipt.

Follow the below steps to open your NPS Account offline

Visit your nearest point of presence (POP), appointed by the PFRDA, with the photocopies of the original know-your-customer (KYC) documents. Almost all banks are enrolled as POPs. Also, keep the originals handy for verification purposes.
You will be given an application form that you must fill out with a black pen.
After filling up the application form, you will receive a 17-digit receipt number.
On successful verification of your application, a kit containing your PRAN number will be delivered to your registered address.
You will also receive a message or an SMS on your registered mobile number informing you about your PRAN number and the kit dispatch.

Document Needed to Open NPS Account

Aadhaar Card
PAN Card
Banking details
Scanned Passport size photograph
Scanned image of your signature

Selecting your Ideal Portfolio in NPS

Active (Individual funds)

You can actively decide how your contribution will be invested in an active choice option. You are required to provide the PFM, Asset Class, and percentage allocation to be done in each scheme. There are the following four Asset Classes that one can choose from:

Asset class E: Equity
Asset class C: Corporate debt
Asset class G: Government Bonds
Asset class A: Alternative Investment Funds

Auto (Lifecycle funds)

This option is for those who do not have adequate knowledge to manage their investments. Under this option, a pre-defined portfolio will decide the proportion of funds invested across three asset classes.

Based on the risk-taking ability of the Subscriber, NPS offers three different portfolio options with age-wise percentage asset allocation as follows:

(a). Aggressive Life Cycle Fund (LC75): Aggressive Life cycle fund comes with a cap of 75% of the total assets for Equity investment.

(b). Moderate Life Cycle Fund ( LC50): Moderate Life cycle fund has a cap of 50% of the total assets for Equity investment.

(C). Conservative Life Cycle Fund (LC25): This Life cycle fund offers a cap of 25% of the total assets for Equity investment.

Features / Benefits of investing in NPS

Returns

National Pension Scheme returns are significantly higher when compared to other long-term tax-saving instruments like Public Provident Funds. A portion of the invested amount goes to equities, allowing NPS to outperform other forms of investment options.

National Pension Scheme has been in effect for more than 10 years and has delivered a steady 8% to 10% return every year since its conception. Moreover, one can also change their fund manager if they want a different investment portfolio for their funds.

Tax efficiency NPS Tax Benefits

There is a deduction of up to Rs.1.5 lakh to be claimed for NPS for your contribution as well as for the contribution of the employer. 80CCD(1) covers the self-contribution, which is a part of Section 80C.

The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.

Section 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers.

The maximum amount eligible for deduction will be the lowest of the below:

Actual NPS contribution by employer
10% of Basic + DA
Gross total income

You can claim any additional self-contribution (up to Rs 50,000) under section 80CCD(1B) as an NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.

Option to Change the Scheme or Fund Manager

With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance. This option is available for both tiers I and II accounts.

Risk in NPS

Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.

However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility.

The earning potential of NPS is higher as compared to other fixed-income schemes.

Withdrawal Rules in NPS

Withdrawal Rule After 60

Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm.

The remaining 60% is tax-free now. The latest update from the government says that the entire NPS withdrawal corpus is exempt from tax.

Partial Withdrawal

For partial withdrawals before the age of 60 years, the following pre-conditions apply

Your NPS account must have been active for at least 3
years
The withdrawal amount should not exceed 25% of your
contributions
A maximum of 3 withdrawals permitted during the tenure
Withdrawal is permitted for extraordinary reasons such as:
i. Children’s higher education
ii. Children’s marriage
iii. Purchase/construction of a house
iv. Treatment of specified critical illnesses

Exit or Complete Withdrawal from NPS

Exit from NPS National Pension System (NPS) is allowed as per the following conditions:

After attaining the age of 60 years. 100% withdrawal permitted only if the corpus is less than or equal to Rs. 5 lakhs
Because of severe disability
Because of a terminal illness
After completion of 20 years of subscription

Alternative of NPS

There are few investment options in India that can beat NPS as a long-term retirement saving plan. However, you can consider unit-linked insurance plans (ULIPs) like Invest 4G from Canara HSBC Life Insurance for the goal:

Invest up to the age of 99 years after starting any time after 18 years of age
Invest in a mix of equity and debt funds
Investments up to Rs 2.5 lakhs per annum in ULIPs will keep your plans’ maturity values tax-free
Automatic rebalancing options keep your folio benefiting from market volatility
Bonus additions for long-term investors aid your folio growth
Life cover improves the safety of your family in your absence
Partial withdrawals are tax-free and available after five years of starting the plan

National Pension System Trust

The NPS Trust was established in 2008 as a separate legal entity, to oversee and manage the funds and assets contributed to the NPS by individuals.

The NPS Trust is responsible for ensuring the integrity and security of the NPS, and for developing and implementing policies and procedures to safeguard the interests of NPS subscribers. It also oversees the appointment and functioning of various intermediaries involved in the NPS, such as pension fund managers, custodians, and aggregators.

Overall, the NPS Trust plays a crucial role in the effective functioning and management of the National Pension System in India, and ensures that the retirement savings of millions of citizens are well-protected and managed.

By Amit Pawar

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