The National Pension System (NPS) was introduced by the Central Government on 1 January 2004. Initially, the scheme was introduced only to Central Government employees (apart from armed forces), however, from 1 May 2009, the scheme was made available to all Indian Citizens. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
National Securities Depository Limited (NSDL) was appointed by the PFRDA as the Central Record keeping Agency (CRA). Functions such as Customer Service, Administration, and Record Keeping of all subscribers of the NPS are handled by the CRA. A Permanent Retirement Account Number (PRAN) is issued by the CRA to all the subscribers who are present under the NPS. Any transactions relating to the PRAN and the Permanent Retirement account is maintained by the CRA as well.
Procedure to open a NPS account
Individuals can open an NPS account both online and offline. Given below is the procedure to open an NPS account both online and offline:
- Online procedure:
- Visit the eNPS website (https://enps.nsdl.com/eNPS/NationalPensionSystem.html) to register online.
- Your mobile number, Aadhaar number, and Permanent Account Number (PAN) must be linked with the NPS account.
- Validate the registration using the OTP which will be sent to your registered mobile number.
- On completion of registration process, you will receive a Permanent Retirement Account Number or PRAN. The PRAN can be used in the future to log in to your profile.
- Offline procedure:
- Visit the nearest Point of Presence (PoP) centre, a bank, or a post office to open an NPS account.
- You will have to submit your Know Your Customer (KYC) documents along with a duly filled up and signed application form.
- The PoP centre will send you a PRAN once you have made your first investment.
- The PRAN along with a password will be present in the welcome kit. The PRAN and password will be required to operate your account.
- You will also be required to pay a one-time registration fee of Rs.125.
You will be required to follow the steps mentioned below to open an NPS account online.
You will be required to follow the steps mentioned below to open an NPS account offline.
NPS Withdrawal Process
Exit rule and early withdrawal under NPS: It is vital that subscribers make investments towards the scheme until they reach 60 years of age as NPS is a pension scheme. However, under certain circumstances, subscribers can withdraw up to 25% of the invested amount if they have invested towards the account for 3 years. Given below are the different cases under which early withdrawal is allowed:
- In case the children of the subscriber are getting married
- For higher studies
- For buying or building a house
- In case of medical treatment of the subscriber or his/her family members
NPS Withdrawal is possible for a maximum of 3 times under the scheme and there must be a minimum gap of at least 5 years between withdrawals. The early withdrawal process is applicable to only Tier-I account. Under Tier-II accounts, the entire investment can be withdrawn.
- Withdrawal after attaining the age of 60: The entire investment made towards the scheme cannot be withdrawn once the subscriber reaches the age of 60 years old. It is mandatory that subscribers retain at least 40% of the investment in order to receive a pension. The pension is given to subscribers from an insurance firm that is registered under the PFRDA. The remaining 60% can be withdrawn and no tax needs to be paid on it.
Documents required for withdrawal NPS amount
Given below is the list of documents that must be submitted in order to withdraw the amount from NPS:
- Withdrawal form
- Original PRAN card
- Proof of identity that has been attested must be submitted
- A cancelled cheque must be submitted
Union Budget 2019 Highlights regarding NPS
NPS subscribers will be relieved to know that in Budget 2019, it has been announced that lump sum withdrawals made from NPS accounts at the time of maturity are now exempt from tax. Under the National Pension Scheme, an investor can withdraw 60% of the accumulated funds as lump sum and the remaining 40% should be used to purchase an annuity plan when he or she turns 60 years old.
Previously, only 40% of the 60% lump sum corpus withdrawal was exempt from tax, but from this year onwards, the whole of the 60% lump sum withdrawal is exempt from tax. This announcement makes NPS more attractive to investors who are looking for low-risk, long-term investments for their retirement.
Different types of NPS accounts
Tier-I and Tier-II are the two types of NPS accounts. While the Tier-I is a mandatory account, the Tier-II is a voluntary account. The differences between the two accounts are mentioned in the table below:
|Category||Tier-I account||Tier-II account|
|Maximum contribution||No limit to the amount of contribution||No limit to the amount of contribution that is made towards the account|
|Minimum contribution||Rs.500 or Rs.1,000 in a year must be made towards the account||Rs.250 must be made towards the account|
|Tax deductions||Subscribers are eligible for a tax deduction of up to Rs.2 lakh.||Subscribers are not eligible for tax deductions under the account.|
|Withdrawals that are allowed||Subscribers cannot withdraw the investments made towards the account until they retire.||Subscribers will be able to withdraw the contributions made towards the account.|
|Status||It is a mandatory account for subscribers who register for an NPS account.||Subscribers can open the account on a voluntary basis.|
The NPS account is mandatory for all Central Government employees. They will have to contribute 10% of their basic salary towards NPS. The NPS scheme is voluntary for all other Indian citizens.
Differences between NPS & other Tax saving schemes
Some of the other schemes that provide NPS tax benefits under Section 80C of the Income Tax Act are Tax-saving Fixed Deposits (FD), Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS). Given below is the table where the difference between NPS and the schemes mentioned above are compared:
|Type of scheme||Rate of interest (p.a.)||Fixed period of investment||Risks of the scheme|
|NPS||The expected rate of interest is between 8% to 10%||Investment towards the scheme is till retirement||The returns on investments are market-related.|
|FD||The rate of interest is guaranteed and is from 7% to 9%.||5 years||The scheme is risk-free.|
|PPF||The rate of interest is guaranteed and is 8%.||15 years||It is a risk-free scheme.|
|ELSS||The expected rate of interest is from 12% to 15%.||3 years||The returns depend on the market.|
Even though the returns that are generated from the scheme may be higher than PPF and FD, however, there are no tax benefits on maturity. Individuals who withdraw 60% of the total investments that have been made towards the account, should know that 20% of that amount is taxable. However, the taxable amount may vary.
The main features of the scheme are mentioned below:
- Eligibility: Indian citizens who are between 18 years and 65 years of age and do not come under any NPS sector are eligible to invest in NPS scheme.
- Cost for registration: Initially, individuals must pay Rs.500 (exclusive of taxes) towards registering for an NPS account.
- Contribution towards NPS: The minimum contribution that must be made towards the scheme is Rs.500 (not including taxes). There is no upper limit to the maximum contribution that can be made. However, the minimum contribution that can be made in a Tier-I account is Rs.1,000 in a financial year.
- Number of contributions: Subscribers must make at least one contribution in a financial year.
- Modes of payment: Payments can be made in the form of Demand Draft (DD), cheque, and cash.
- Change of scheme and fund manager: In case subscribers are not happy with the overall performance of the scheme, they are allowed to change the fund manager or the pension scheme. Both the Tier-I and the Tier-II accounts come with these options.
Tax benefits under NPS
Under Section 80C of the Income Tax Act, subscribers under NPS are eligible for tax deductions of up to Rs.1.5 lakh. The tax deduction is inclusive of both the employer’s and the subscriber’s contribution.
- Section 80CCD(1) of the Income Tax Act covers contributions made by the subscribers. It is part of Section 80C and the maximum deduction that can be claimed under this section is 10% of the employee’s salary. However, it cannot be more than the maximum limit that is allowed. For self-employed individuals, the maximum limit of tax deduction that is allowed is 20% of the gross income.
- The employer’s contribution towards the NPS is covered under Section 80CCD(2) of the Income Tax Act. This section is not a part of Section 80C of the Income Tax Act. Self-employed subscribers cannot avail benefits under this section. The amount of tax deduction available under the scheme can either be 10% of the basic salary and dearness allowance, or the gross income, or the actual contribution that is made by the employer towards NPS, whichever is lower.
- Additionally, under Section 80CCD(1B), an additional tax deduction of up to Rs.50,000 can be claimed on any self-contribution made towards to the scheme.
Therefore, in total NPS subscribers are eligible for tax deductions of up to Rs.2 lakh.
NPS Rules of allocation
Investments are made in various schemes by the NPS. Investment is made towards equity under Scheme E of the NPS. Subscribers can contribute up to 50% of their total investments towards equities. Active choice and auto choice are the two different options of investments that are available.
- Active choice: Under active choice, the scheme and the type of split can be decided by the subscriber.
- Auto choice: Under auto choice, depending on the subscriber’s age, the option decides the risks of the investment. Therefore, less risky and more stable investments are chosen if the subscriber is older.
- Following retirement, are employees engaged in government service eligible for leave encasement as per the guidelines of the NPS?
- What is the reason behind the compulsory utilization of a minimum of 40% of the accumulated pension funds to buy annuities after retirement?
- Which body is responsible for the calculation of interest with regards to the NPS?
- Which agency or office will be responsible for contribution deductions In the event of the transfer of an employee during the course of the month?
- What are the KYC documents required to enroll for NPS through SBI?
No. Leave encasement is not allowed as per the guidelines of NPS laid down by the CCS and does not count as a component of the benefits available to the employee after retirement.
The main reason behind this move is to ensure employees in government service will still obtain a regular and stable income every month following their retirement.
The interest is calculated by the The Pension Accounting Office, who is the official body appointed for this particular task
The office that draws the salary of the subscriber for the maximum amount of time during the month will be responsible for the deduction of contribution towards the NPS
The following documents are required to be submitted at the time of making the application:
- Subscriber registration form
- Photo ID proof
- Proof for Date of Birth
- Proof of residence
The following modes are accepted by SBI for NPS premium payments:
- Direct payment at an SBI Life branch
- Through standing order on credit card
- Online payments
- Electronic Clearing Service
- Payments through SBI Life’s mobile app
- Through National Automated Clearing House (NACH)
- Through POS terminals at authorized SBI Life branches
Simply login to the SBI Life customer portal and fill in details such as Customer ID and NPS policy number to view your current status.
The minimum contribution amount for Tier I accounts is Rs.500 per month and that for Tier II accounts is Rs.250 per month. Subscribers should also maintain a minimum balance of Rs.6000 for Tier I and Rs.2000 for Tier II at the end of the year.
You need to submit the settlement form along with the essential documents for claim settlement at the branch where you maintain your NPS account. For details on claim settlements you can send an email to firstname.lastname@example.org. The final decision on claims will be based on the disclosures made in the proposal form by the subscriber.
The insurance companies licensed by the IRDA and authorized by the PFRDA act as the annuity service providers to NPS subscribers.
NPS is a cost effective, flexible and portable retirement savings scheme in which the wealth accumulated depends on the contributions made by the individual.
The total number of NPS subscribers as on 30 Dec, 2016 is 1,02,76,250.
Using the NPS app, you can raise a request for transaction statement for the particular fiscal year. You can also view the details of scheme wise units and update your contact information.
NPS Other Pages
- HDFC National Pension Scheme
- ICICI Bank National Pension System
- NPS Withdrawal Forms
- POP and CRA Charges under NPS
- Axis Bank National Pension System
- Bank of Baroda National Pension System
- Bank of Maharashtra New Pension Scheme
- Central bank of India New Pension Scheme
- South Indian Bank New Pension Scheme
- Canara Bank New Pension System
- Corporation Bank New Pension Scheme
- Federal Bank New Pension Scheme
- IDBI New Pension Scheme