NPS - National Pension Scheme

The National Pension System is a long-term and voluntary investment scheme that helps its subscribers after retirement.
  • Providing additional security for old age citizens in India
  • Provide income to old age Indian citizens. 
  • Over the long run, decent returns on the investments are expected. 
  • More

    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.

    NPS
    National Pension Scheme

    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

    FAQ’s

    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 claims@sbilife.co.in. 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.

    News About NPS

    • Overseas cardholders now eligible to subscribe to NPS

      The government of India's National Pension System (NPS) has now been extended to Overseas Citizen of India (OCI) cardholders. The scheme already included NRIs. The OCI cards are issued to overseas citizens who are of Indian origin. The card allows such citizens to visit India any time by offering a multipurpose, multiple entry and lifelong visa.

      Following the move, the Reserve Bank of India will amend article 20(R) of Foreign Exchange Management Act (FEMA). The NPS was launched on January 1, 2004. It was created with the aim to provide retirement income to all the citizens of India. In 2015, the scheme was extended to NRIs.

      The Pension Fund Regulatory and Development Authority (PFRDA) has asked RBI to amend article 20(R) at the earliest to launch the scheme for OCI cardholders.

      2 April 2019

    • Government employees and pensioners get a 3% hike in DA

      In a decision that will benefit about 1.60 lakh pensioners and 4.50 lakh State Government employees, the State Administration Council (SAC) has sanctioned a 3% hike on Dearness Allowance (DA) on the basic pay with effect from 1 January 2019.

      The total amount that has been accumulated will be paid by cash after 1 April 2019. As per the approval, employees are now entitled 12% DA on the basic pay with effect from 1 January 2019. The impact on the finance ministry due to the increase in Dearness Allowance is Rs.600 crore.

      1 March 2019

    • Minimum Assured Return Option can be Chosen by NPS Subscribers

      There is super great news for the existing investors or soon-to-be investors of the National Pension System or NPS. The pension fund regulator has been working to establish a scheme that will essentially give the subscribers the option to choose the fund option that gives out minimum assured returns on a regular basis. National Pension System is the Indian Government’s flagship social security programme and it has been benefitting millions of Indians for over a decade now.

      It has been learnt that the Pension Fund Regulatory and Development Authority of India has gotten in touch with actuarial firms and has invited an Expression of Interest (EoI) from them to develop and design and in turn recommend a minimum assured return scheme or MARS that can in turn be implemented under the infrastructure of the National Pension System in India. This potentially beneficial structure will include the exit load component and exit the penalty recommendation with regards to MARS. Once MARS has been implemented, it will ensure that the NPS subscribers are receiving a minimum assured return over a certain period of time. If there is a lag in the programme, the amount will then be compensated by the sponsor of the scheme.

      There are talks of implementation of a guarantee reset period that can be set according to the subscriber’s interest as well as the pension funds. The reset period can be set either annually, half-yearly, or quarterly.

      26 February 2019

    • NPS subscribers might get to choose funds with minimum assured return

      National Pension System (NPS) subscribers might get the freedom to select the fund option coming with a minimum assured return soon. An Expression of Interest has been invited by the Pension Fund Regulatory and Development Authority (PFRDA) from top Actuarial companies to design and develop a Minimum Assured Return Scheme (MARS) for the subscribers of NPS. PFRDA have asked them to create and develop a minimum assured return scheme which can be executed under the NPS infrastructure. As a matter of fact, the NPS returns are presently connected to the performance of the underlying instruments like debt, equity or both. NPS which was started as a contributory pension scheme might get changed after the implementation of MARS and it might not give fixed returns anymore. Instead, it might give minimum return over a certain period. However, it is expected that there might be a guarantee reset period like quarterly, half yearly, annual, or any other recommended time period to balance the interest of the subscriber and the Pension Funds offering such products.

      19 February 2019

    • Union Government Proposed New Pension Scheme for Unorganised Sector

      The Union Government led by the Prime Minister of India, Narendra Modi, has recently proposed a new pension scheme for employees working in the unorganised sector. During the Budget speech on 1 February 2019, the Finance Minister - Piyush Goyal – stated that the government intends to introduce a mega pension scheme for the unorganised sector employees who earn up to Rs.15,000 per month. Named as Pradhan Mantri Shram-Yogi Maandhan, this pension scheme will offer them an assured monthly pension of Rs.3,000 after attaining the age of 60 years. Individuals can enrol for this plan by contributing a small affordable amount on a monthly basis during the years of their employment.

      The Finance Minister further mentioned that a worker from the unorganised sector joining this pension scheme at the age of 29 years will have to contribute only Rs.100 per month till he/she is 60 years old. On the other hand, a monthly contribution of Rs.55 only will be required for an employee joining the pension scheme at 18 years of age. Apart from the employees’ contribution, the government will deposit an equal amount in the employee’s pension account each month. Approximately 10 crore labourers and workers who are working in the unorganised sector are expected to be able to benefit from the Pradhan Mantri Shram-Yogi Maandhan in the next 5 years.

      18 February 2019

    • Rs.10,000 crore to be released by government for NPS

      As their share, the government will soon release arrears of Rs.10,000 crore for the National Pension System (NPS) for state employees according to Uttar Pradesh Chief Minister Yogi Adityanath. The chief minister further added that the government’s share towards NPS has increased from 10% to 14%.

      NPS was introduced by the government in 2004 for its employees, but in 2009 became available for all Indian citizens. On retirement, subscribers can withdraw a portion of the amount as a lump sum and the rest must be used to buy annuity that can used for income after retirement. Tier-I and Tier-II are the two types of NPS accounts available.

      15 February 2019

    • Minimum Wages of Labours records a growth of 42% over the last 5 years

      The minimum wages of labourers from all the classes have registered an increase of 42%. This increase is the highest amount of increase ever recorded. The formalisation of the economy and the high amount of growth recorded has resulted in the improvement of employment opportunities as we can see from the EPFO membership. The increase is by around 2 crores in as many years, showing the formalisation that has happened with the economy. The New Pension Scheme has been liberalised and the recommendations of the 7th Pay Commission were also implemented. The contribution from the government to the New Pension Scheme has also been increased to 14% from the 10% that was in place previously. Gratuity payment limit has also been increased to Rs.20 lakh. This is an increase of Rs.10 lakh from the previous limit. The eligibility cover limit of ESIC has also been increased from the existing Rs.15,000 to Rs.21,000 for one month. A minimum pension of Rs.1,000 has been fixed for all labours. In case the labour meets with an unfortunate incident resulting in death, the contribution to EPFO will increase to Rs.6 lakh from the existing Rs.2.5 lakh. Payment for labours under the Asha scheme and Anganwadi scheme has increase by close to 50%.

      5 February 2019

    • NPS subscribers and government officials to resubmit partial withdrawal forms by January 31

      Subscribers have been asked to resubmit completed partial withdrawal form and documents in physical form by the National Pension Scheme (NPS) trust. This is applicable for those who have requested for online partial withdrawal till 30 November 2018.

      Applications will be treated as withdrawn if hard copy and documents are not submitted to the nodal office by 31 January 2019. NPS subscribers will need to submit the documents and partial withdrawal form to the nearest Point of Presence (POP), while the nodal office for government sector subscribers will be the Drawing and Disbursing Office, Pay & Accounts Office, or the District Treasury Office. POP will be the nodal office for all others.

      9 January 2019

    • Cabinet approves raising Government Contribution to NPS to 14%

      The Cabinet has recently raised the contribution of the government towards the National Pension Scheme (NPS) to 14% of the basic salary from the present rate of 10%. However, the minimum employee contribution will remain 10%.

      The Cabinet has also approved tax incentives for employees’ contribution to the extent of 10% under Section 80C of the Income Tax Act. At present, the contribution made by the government and the employee towards the NPS is 10% of the basic salary each. While the minimum contribution remains at 10% for the employees, the government contribution has been raised to 14% from 10%. The Cabinet, led by Prime Minister Narendra Modi, has also allowed the government employees to commute 60% of the fund collected at the time of retirement, up from 40% at present. Sources have also revealed that the employees will now have the option to invest in either fixed income instruments or equities. The government is yet to decide the date of notification of the new scheme. Sources are of the opinion, that the new scheme will come into effect in the next financial year.

      13 December 2018

    • Tax exemption for NPS withdrawal now 100%

      Investors in the National Pension Scheme (NPS) can withdraw 60% of the corpus fund on maturity and have to invest the remaining 40% in buying an annuity. The 60% that can be withdrawn has now been given 100% tax exemption by the government. As of now, 40% of the amount that is withdrawn was tax free with 20% being taxable.

      The tax exemption has made NPS on par with the Employee Provident Fund and Public Provident Fund since the principal amount is not taxable at all. The Central Government’s contribution to the NPS was also raised to 14% of the salary from the 10% that it is currently. This makes the NPS better than the pension which was defined under the old system since pensioners get a pension of 50% of the salary that was drawn last. Central government employees are now also able to decide their investment patterns and choose their pension funds. When government employees invest in the Tier II NPS funds, it is now eligible for tax deduction under Section 80C, but only if there is a 3-year lock-in period. Since the expense ratios of the funds in NPS are very low, at 0.01%, it results in even greater returns.

      12 December 2018

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