National Pension Scheme (NPS) Quick Guide
Published On Mar 09, 2021 12:00 AM By InsuranceDekho
Table of Contents
- Key Features of the National Pension Scheme (NPS)
- Benefits under the National Pension Scheme (NPS)
- Eligibility Criteria for the National Pension Scheme (NPS)
- Types of Accounts under the National Pension Scheme (NPS)
- Investment Options under the National Pension Scheme (NPS) of India
- Types of Funds in the National Pension Scheme (NPS)
- National Pension Scheme (NPS) Fund Managers
- How to Open an Account at the National Pension Scheme (NPS) of India
- Online Registration Process for National Pension Scheme (NPS)
- Offline Registration Process for the National Pension Scheme (NPS) in India
National Pension Scheme (NPS) is a government sponsored pension scheme launched by the Government of India in 2004 for government employees. In 2009, the scheme was expanded to incorporate all other sectors and has been effectively addressing the financial concern and stability of senior citizens in India since then. Any Indian citizen, except military personnel from within the age group of 18 to 60 years of age can open a NPS account.
Under this scheme, an individual can invest their money in market linked instruments such as debt and equity with a minimum contribution of INR 6,000 in a financial year which can be paid either as lump sum or in monthly installments of INR 500. The return of these investments depend upon the market performance of these instruments. The NPS offers an interest rate of 8-10% on the contribution made.
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Key Features of the National Pension Scheme (NPS)
The following are some of the key features of the National Pension Scheme (NPS) that make is significantly different from other pension schemes -
1. Different Accounts
The NPS allows individuals to make systematic investments via two different kinds of accounts, namely Tier-I and Tier-II.
2. Investment Options
The NPS allows its beneficiaries the option of choosing from two investment options such as the Active Choice Fund and the Auto Choice or Lifecycle Fund.
3. Partial Withdrawals
Under this scheme, individuals can partially withdraw their contribution to meet specific financial needs before their retirement. According to the rules of partial withdrawal, a subscriber can make withdrawals from their Tier I schemes upto a maximum limit of 25% after 3 years of opening an account.
4. Postpone Maturity
The NPS also has an extendable maturity feature whereby individuals can extend the maturity of their funds by 10 years after the age of 60 years.
5. Low Cost
NPS has a very low cost structure with management charges as low as 0.01% per annum for the accumulated amount.
6. Subscriber’s Control
NPS offers its subscribers complete control of their investments in choosing the allocation amount for different asset classes as per their risk profile and financial requirements.
NPS is a highly flexible scheme whose subscribers have the offer of switching their investment preferences between the two investment options at no extra cost and can also change their fund manager if they are not satisfied by its terms and conditions. At the time of retirement, the annuity service provider as well as the annuity scheme can be changed by NPS subscribers at their will.
Benefits under the National Pension Scheme (NPS)
The following are some of the benefits available under the National Pension Scheme (NPS) -
1. Return or Interest Benefit
This feature allows individuals to invest and accumulate funds in the NPS for future. Under this option, a portion of the sum contributed to NPS is invested in market instruments like debts and equities from which the investor could earn a high return. With an interest rate of 9 % to 12%, this plan suits the investment requirements of an individual who wants a financially secure future.
2. Tax Benefit
A maximum contribution of INR 1,50,000 towards the NPS is eligible for tax exemption under Section 80C of the Income Tax Act. Under this option, 40% of the accumulated fund kept in the individual’s account receives a regular annuity from the PFRDA insurance firms and the remaining 60% of the accumulated fund is tax free. It should be noted that contributions made by both the employer and the employee are exempted from tax in this feature.
3. Premature Withdrawal Benefit
It is mandatory for individuals to invest in the NPS till 60 years of age as it is primarily a pension scheme. However, individuals can avail a premature withdrawal facility after 3 years from the date of opening the account and can withdraw 25% of the total contribution made by them. This feature is available only when the individual is in dire need of funds for occasions where they have to sponsor their child’s education, purchase property or receive emergency medical treatment. They can withdraw for 3 times in intervals of 5 years till the date of maturity. The premature withdrawal benefit is available for only Tier I and Tier II accounts.
4. Maturity Withdrawal Benefit
This benefit option is available to Tier I account holders under NPS. By the feature, a Tier I account holder can lock-in their maturity till the age of their retirement and the withdrawals from the scheme can also be postponed till the age of 70 years. At the time of retirement, the subscriber can withdraw their matured savings either as a lump sum amount equalling 60% of the total amount or at least 40% of the total amount that they can use to purchase annuity from life insurance companies.
5. Risk Assessment Benefit
The NPS currently offers an equity exposure cap of 75% to 50%. This feature allows government employees an equity exposure cap of 50% and in the above mentioned range, the equity portion is reduced by 2.5% every year beginning as soon as investors reach the age of 50 years. This facility balances the equation of risk return for the investors and offers a higher earning potential in comparison with other income schemes.
Eligibility Criteria for the National Pension Scheme (NPS)
The following is a list of eligibility conditions for anyone seeking to contribute or invest in the National Pension Scheme (NPS) of the Government of India -
- The individual must be a citizen of India, except military personnel.
- The minimum age for opening an NPS account is 18 years and the maximum age for the same is 65 years.
- The individual must have KYC
- The individual should not have any earlier account with the NPS
Types of Accounts under the National Pension Scheme (NPS)
There are two types of accounts under the NPS, namely Tier I and Tier II accounts. The following points offer the details of each of the two accounts -
1. Tier I Account
A Tier I account is a basic pension account with limitations on withdrawals. An individual with a Tier I account can withdraw only 25% of their contributed funds before attaining the age of 60 years and the remaining 75% has to be used for purchasing annuity from an insurance company. After the account holder completes 60 years of age, they can withdraw 60% of their contributed fund and use the remaining 40% for buying annuity from life insurers.
Government employees who hold this account can invest 10% of their basic salary and a dearness allowance that they receive from the government in this account while non-government employees who hold this account have to pay a minimum annual contribution of INR 6,000 payable either in lump sum or in monthly instalments of INR 500. For government employees, their investments will be directed to Corporate and Government bonds, whereas for the others, the investment has to be directed in stocks, government and corporate funds, fixed deposits and liquid funds.
2. Tier II Account
A Tier II account is a voluntary savings option without any kind of limitations on withdrawals. A Tier II account holder can withdraw money without any number of limits.
Under this account, whether a government employee or not, all account holders have to invest a sum of INR 1000 at the time of opening their account or make a minimum contribution of INR 250 per month and maintain a minimum balance of INR 2000 at the end of each financial year. There is no default or fixed investment option under this account and the investor can choose from a number of market instruments such as equity, corporate bonds, government funds, fixed deposits and liquid funds.
Investment Options under the National Pension Scheme (NPS) of India
The investment options under the NPS vary across three classes of funds namely Class E, Class C and Class G. These three classes of equity stocks invest in equity stocks, corporate bonds and government bonds respectively. From amongst these options, an investor or subscriber can choose any of the following investment options available to them -
1. Active Choice
Under this investment option, the investor or the subscriber has the choice of deciding the amount they want to invest in Equity, Corporate Bonds and Government Bonds. However, the allocation of funds are subject to the following conditions -
The portfolio allocation for Class E (Equity) funds cannot exceed the limit of 75% upto the age of 50 years.
After the subscriber attains the age of 50 years, the equity allocation would be reduced by 2.5% every year till the individual attains 60 years of age.
Government employees can make a maximum fund allocation of 50% to equities.
Investment allocation in Alternative Investment Funds (AIFs) should be restricted to 5% of the total portfolio.
2. Auto Choice or Lifecycle Funds
Under this investment option, the subscriber or the investor does not need to choose their investment amount in different classes of assets. Instead, their investment amounts are decided by the specific asset classes by following a lifecycle approach. For example, under this investment option, the investor would have a higher amount of asset allocation in equities at a younger age and the amount would gradually be reduced with the increase in their age. This feature offers a stability to the portfolio funds when the subscriber is close to retiring from his job.
The Auto Choice or Lifecycle Fund offers the following three options to the subscriber to choose from while matching their risk profile and financial requirements. The options are -
- Aggressive Lifecycle Fund
- Moderate Lifecycle Fund
- Conservative Lifecycle Fund
Types of Funds in the National Pension Scheme (NPS)
The following are the different types of fund options available under the National Pension Scheme of India -
Class of Fund
Index based Stocks
Government Bonds, PSUs and Private Firms
Central Government Bonds
National Pension Scheme (NPS) Fund Managers
The money invested from the National Pension Scheme (NPS) is managed by PFRDA authorized pension fund managers. At present, there are 8 pension fund management entities across asset categories like equities, corporate bonds and government bonds. The fund managers under the NPS are as follows -
- LIC Pension Fund Limited
- SBI Pension Funds Private Limited
- UTI Retirement Solutions Limited
- Birla Sun Life Pension Management Limited
- Reliance Capital Pension Fund Limited
- Kotak Mahindra Pension Fund Limited
- HDFC Pension Management Company Limited
- ICICI Prudential Pension Funds Management Company Limited
How to Open an Account at the National Pension Scheme (NPS) of India
Opening an account under the National Pension Scheme is very easy. It can be done both online by visiting the eNPS website or the online portals of the Point of Presence-Service Provider (POP-SP) and offline by visiting the nearest POP-SP.
Online Registration Process for National Pension Scheme (NPS)
The online registration process of NPS can be done in the following steps -
- Visit the eNPS website
- Submit KYC details with the selected Point of Presence
- Submit duly filled in online form
- Make the initial payment towards the NPS account
The following are a list of documents that must be submitted by the applicant for successfully registering online for their NPS account -
- PAN Card
- Cancelled Cheque
After all of these steps have been fulfilled, the applicant can choose the print and courier option whereby after printing the online form, they have to attach a photograph and put a signature on it and send it to the Central Recordkeeping Agency’s (CRA) office address mentioned on the page and their registrations will be complete.
Offline Registration Process for the National Pension Scheme (NPS) in India
The offline registration process for NPS in India can be done in the following steps -
- The applicant has to obtain an application form from his nearest Point of Presence or download the same from the eNPS website.
- The applicant has to submit the duly filled in application form with all the details with a photograph, signature, selected scheme preferences and submit it to their nearest Point of Presence along with a KYC document.
- After this, the applicant has to make the initial contribution towards his NPS account at the nearest POP-SP while submitting their application.
- The information and application submitted by the applicant will then be assessed by the POP-SP and passed onto the Central Recordkeeping Agency (CRA) for the generation of PRAN (Permanent Retirement Account Number).
After 10 days of receiving the KYC and application forms, the CRA will issue PRAN. The subscriber will be notified through email or their registered mobile number and the registration process will be complete.
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