Planning for retirement is one of the most important financial goals, yet it’s often overlooked until it’s too late. While we focus on our day-to-day expenses and short-term goals, it is crucial to also think about the long-term and ensure we have enough savings to lead a comfortable life post-retirement. This is where the National Pension Scheme (NPS) comes in—a government-backed initiative designed to help individuals create a retirement corpus while enjoying significant tax benefits.
The NPS is an attractive option for both working professionals and self-employed individuals looking for a structured way to save for their future. With a range of investment options and the potential to build a sizable retirement fund, the NPS is becoming increasingly popular as a reliable way to secure one’s financial independence in retirement. In this guide, we’ll cover what the National Pension Scheme is, how it works, and why it could be the perfect solution for your retirement planning needs.
What is the National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a retirement savings scheme launched by the Government of India to provide a sustainable income source after retirement. It is a voluntary, defined-contribution pension system that is available to all Indian citizens between the ages of 18 and 70. The NPS aims to promote systematic savings and ensure that individuals have a regular income stream during their golden years.
The NPS allows subscribers to contribute to their retirement savings during their working years and receive the accumulated amount as a pension upon retirement. The scheme offers two types of accounts—Tier I and Tier II:
Understanding Tier 1 and Tier II Accounts in NPS
- Tier I Account: This is the primary pension account, and contributions to this account are mandatory for availing the tax benefits under NPS. The funds in this account are locked in until the subscriber reaches the age of 60, with partial withdrawals allowed under specific conditions.
- Tier II Account: This is an optional account that offers greater flexibility, allowing subscribers to invest and withdraw funds as needed. However, contributions to the Tier II account do not offer tax benefits like those in the Tier I account.
The contributions made to the NPS are invested in a mix of equity, corporate debt, and government securities, with subscribers having the option to choose their preferred investment allocation. Additionally, NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and safety of investments.
One of the key features of the NPS is its tax benefits. Subscribers can claim tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act, making it a tax-efficient way to save for retirement. Upon retirement, subscribers can withdraw up to 60% of the corpus as a lump sum, which is tax-free, while the remaining 40% is used to purchase an annuity to provide a regular pension.
Objectives of National Pension System
The main objectives of the National Pension System are:
- Provide Financial Security: The NPS aims to provide financial security to individuals after they retire by ensuring a regular source of income.
- Encourage Savings: By encouraging individuals to make systematic contributions throughout their working life, the NPS promotes the habit of long-term savings.
- Inclusive Coverage: The NPS is designed to be accessible to all Indian citizens, regardless of their employment status, ensuring that both salaried and self-employed individuals can participate.
- Transparent and Low-Cost Investment: NPS is managed by professional pension fund managers, and its regulated structure ensures transparency and cost-efficiency, making it an affordable retirement planning solution.
- Tax Benefits: NPS offers significant tax benefits, which help individuals reduce their tax liabilities while saving for retirement.
Features of National Pension Scheme
- Voluntary Participation: The NPS is open to all Indian citizens on a voluntary basis. Subscribers can choose how much they want to contribute and when.
- Flexible Investment Options: Subscribers have the flexibility to choose their preferred investment allocation between equity, corporate debt, and government securities, or they can opt for an auto-choice option based on their age.
- Two Types of Accounts:
- Tier I Account: Mandatory for pension benefits with restrictions on withdrawal until retirement.
- Tier II Account: Optional account with flexible withdrawals and no tax benefits.
- Low Cost: The NPS is one of the lowest-cost retirement investment products available, with low fund management fees, ensuring that more of your contributions are invested for growth.
- Regulated by PFRDA: The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures a high level of transparency, accountability, and security for subscribers.
- Tax Benefits: Contributions to the NPS are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act, making it a tax-efficient way to save for retirement.
- Withdrawal Flexibility: At retirement, subscribers can withdraw up to 60% of the accumulated corpus as a lump sum (tax-free), while the remaining 40% is used to purchase an annuity that provides a regular pension.
- Portability: The NPS is portable across different locations and employment types. Subscribers can continue their account without interruption, even if they change jobs or move to another city.
Eligibility Criteria for National Pension Scheme
To be eligible for the National Pension Scheme, individuals must meet the following criteria:
- Age Requirement: Any Indian citizen between the ages of 18 and 70 years can join the NPS.
- KYC Compliance: Subscribers must complete the Know Your Customer (KYC) process to verify their identity and address.
- Resident and Non-Resident Indians: Both residents and non-resident Indians (NRIs) are eligible to join the NPS. However, in the case of NRIs, contributions are subject to regulatory requirements.
- Voluntary Enrollment: Enrollment in the NPS is entirely voluntary and is open to individuals from all employment backgrounds, including salaried and self-employed.
Types of NPS Accounts
| Account Type | Description |
| Tier I Account | Primary pension account with mandatory contributions, tax benefits, and withdrawal restrictions until retirement. |
| Tier II Account | Optional investment account with flexible withdrawals, no tax benefits, and no withdrawal restrictions. |
Returns of National Pension Scheme
The returns from the National Pension Scheme depend on the performance of the investments made by the pension fund managers. The contributions made to the NPS are invested in a mix of equity, corporate bonds, and government securities, allowing subscribers to benefit from market-linked growth. Subscribers have the option to choose their preferred investment allocation or opt for an auto-choice option, where the allocation is adjusted based on the subscriber’s age.
- Equity Investments: The NPS invests a portion of contributions in equities, which can provide higher returns over the long term. However, equity investments also come with higher risk due to market fluctuations.
- Corporate Bonds and Government Securities: The remaining portion is invested in corporate bonds and government securities, which offer more stable returns with lower risk compared to equities.
- Historical Returns: Over the years, the NPS has delivered competitive returns compared to other retirement savings options. The returns vary based on the choice of pension fund manager and the allocation of investments. On average, NPS returns have ranged between 8% to 10% per annum, making it an attractive option for long-term retirement planning.
How to Apply for NPS Account?
Applying for an NPS account is a simple process and can be done either online or offline:
- Online Application (eNPS Portal):
- Visit the eNPS portal on the official NPS website.
- Click on the option to register for an NPS account.
- Fill in the required details, such as personal information, address, and bank account details.
- Complete the KYC process by providing your Aadhaar or PAN card details.
- Make your initial contribution online using net banking or debit card.
- Once the process is complete, you will receive a Permanent Retirement Account Number (PRAN).
- Offline Application:
- Visit a Point of Presence (POP), which can be a bank or other authorized entity offering NPS services.
- Collect the NPS registration form and fill in the necessary details.
- Submit the form along with KYC documents, such as your PAN card, Aadhaar card, and address proof.
- Make the initial contribution at the POP.
- After processing, you will receive your Permanent Retirement Account Number (PRAN).
Whether you choose the online or offline route, you will be assigned a PRAN that serves as a unique identifier for your NPS account. This number will be used for all future transactions and correspondence related to your NPS account.
How to Log In to the NPS Account?
Logging in to your NPS account is straightforward and can be done through the eNPS portal. Here are the steps to log in:
- Visit the eNPS Portal: Go to the official eNPS website (https://enps.nsdl.com).
- Enter Your Credentials:
- Click on the “Login with PRAN/IPIN” option.
- Enter your Permanent Retirement Account Number (PRAN) and the password (IPIN) that you received upon registration.
- Access Your Account: Once logged in, you can view your account details, transaction history, contributions, and the performance of your NPS investments.
- Resetting Password: If you forget your IPIN, you can reset it through the portal by clicking on the “Forgot Password” link and following the instructions.
Tax Benefits on National Pension Scheme (NPS)
| Tax Benefit Section | Description |
| Section 80C | Contributions up to ₹1.5 lakh per financial year are eligible for tax deduction under Section 80C. |
| Section 80CCD(1) | Additional deduction up to 10% of salary (for salaried individuals) or 20% of gross income (for self-employed individuals) under Section 80CCD(1). |
| Section 80CCD(1B) | An additional deduction of up to ₹50,000 is available under Section 80CCD(1B) for NPS contributions. |
| Section 80CCD(2) | Employer’s contribution up to 10% of basic salary and dearness allowance is eligible for tax deduction under Section 80CCD(2). This benefit is over and above the limits under Section 80C and Section 80CCD(1B). |
| Tax-Free Lump Sum Withdrawal | At the time of retirement, subscribers can withdraw up to 60% of the accumulated corpus as a lump sum, which is tax-free. |
| Tax on Annuity | The remaining 40% of the corpus must be used to purchase an annuity, which provides a regular pension. The annuity income is taxable as per the subscriber’s income tax slab. |
The tax benefits offered by the NPS make it an attractive option for individuals looking to save for retirement while reducing their overall tax liability. By taking advantage of the deductions under Sections 80C, 80CCD(1), 80CCD(1B), and 80CCD(2), subscribers can maximize their savings and build a substantial retirement corpus.
Conclusion
The National Pension Scheme (NPS) is a robust retirement planning tool that offers a structured way to build a retirement corpus while enjoying significant tax benefits. With its flexibility, low cost, and regulated structure, NPS provides a reliable option for individuals looking to secure their financial future. By taking advantage of the available tax deductions, contributors can reduce their tax liabilities and ensure a comfortable post-retirement life. Whether you are a salaried professional or self-employed, the NPS can be an effective solution to achieve financial independence during your golden years.
FAQs
What is the National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a government-backed retirement savings scheme that allows individuals to contribute systematically towards building a retirement corpus, providing financial security after retirement.
- Who is eligible to join the NPS?
Any Indian citizen between the ages of 18 and 70 years can join the NPS. Both residents and non-resident Indians (NRIs) are eligible.
- What are the types of accounts under NPS?
There are two types of accounts under NPS: Tier I Account (mandatory for pension benefits with withdrawal restrictions) and Tier II Account (optional account with flexible withdrawals and no tax benefits).
- What are the tax benefits available under NPS?
NPS offers tax benefits under Section 80C, Section 80CCD(1), Section 80CCD(1B), and Section 80CCD(2), providing deductions up to ₹2 lakh or more, depending on the contribution type.
- Can I withdraw money from my NPS account before retirement?
Partial withdrawals are allowed from the Tier I Account under specific conditions, such as for higher education, buying a house, or medical emergencies. The Tier II Account allows flexible withdrawals at any time.
- How is the money invested in NPS?
The contributions to NPS are invested in a mix of equity, corporate bonds, and government securities. Subscribers can choose their preferred investment allocation or opt for an auto-choice option.
- What are the expected returns from NPS?
NPS offers market-linked returns, with historical returns ranging between 8% to 10% per annum, depending on the investment allocation and performance of the pension fund manager.
- Is the NPS contribution limit fixed?
No, there is no fixed limit for contributions. Subscribers can choose how much they wish to contribute, with a minimum contribution of ₹500 for Tier I and ₹1,000 per year.
- What happens to my NPS account if I change jobs or relocate?
The NPS account is portable across jobs and locations, allowing subscribers to continue their account without any interruption, regardless of employment changes or relocation.
- How do I receive the pension after retirement?
Upon reaching the age of 60, subscribers can withdraw up to 60% of the accumulated corpus as a tax-free lump sum, while the remaining 40% is used to purchase an annuity that provides a regular pension. The annuity income is taxable as per the applicable income tax slab.
