What is NPS?
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 Recordkeeping 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.
Features of the NPS
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.
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 the NPS and other tax saving schemes
Some of the other schemes that provide 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.
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: It is very easy for individuals to open an NPS account online. Individuals can visit the eNPS website (https://enps.nsdl.com/eNPS/NationalPensionSystem.html) to register online. However, the mobile number, Aadhaar, and Permanent Account Number (PAN) of the individual must be linked with the NPS account. In order to complete the validation, an OTP will be sent to the registered mobile number of the individual. On completion of registration, the subscriber will receive a PRAN, which can be used to log in.
- Offline procedure: Individuals will need to visit the Point of Presence (PoP) centre, a bank, or post office to open an NPS account. The application form along with the Know Your Customer (KYC) documents must be submitted by the individual. Upon making the first investment, the PoP centre will send the individual a PRAN. The PRAN along with a password will be present in the welcome kit. These details will help an individual operate the account. However, individuals must pay a one-time registration fee of Rs.125.
Tax benefits under the National Pension Scheme
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.
Rules of allocation of the National Pension System
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.
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
1. Following retirement, are employees engaged in government service eligible for leave encasement as per the guidelines of the NPS?
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.
2. What is the reason behind the compulsory utilization of a minimum of 40% of the accumulated pension funds to buy annuities 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.
3. Which body is responsible for the calculation of interest with regards to the NPS?
The interest is calculated by the The Pension Accounting Office, who is the official body appointed for this particular task
4. 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?
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
5. What are the KYC documents required to enroll for NPS through SBI?
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
6. What are the different modes of payments available with SBI Pension Funds Pvt. Ltd.?
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
7. How to check the status of your NPS account in SBI?
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.
8. What are the minimum contribution amounts for Tier I and Tier II accounts?
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.
9. How does SBI settle the NPS claims?
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.
10. Who provides annuity on withdrawal or maturity under NPS?
The insurance companies licensed by the IRDA and authorized by the PFRDA act as the annuity service providers to NPS subscribers.
11. Is NPS an easily accessible system of long term investments?
NPS is a cost effective, flexible and portable retirement savings scheme in which the wealth accumulated depends on the contributions made by the individual.
12. How many subscribers does NPS have?
The total number of NPS subscribers as on 30 Dec, 2016 is 1,02,76,250.
13. What are the features of NPS app?
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 Features and Guidelines
- NPS Withdrawal Forms
- New Pension Scheme
- 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