Urban Money

NPS - National Pension Scheme

What is the National Pension Scheme?

The National Pension Scheme is also known as the National Pension System. In the NPS scheme, the subscribers make a minimum contribution of Rs.6,000 in a fiscal year. This contribution can be paid in total or as a monthly instalment of a minimum of Rs. 500. 

In simple words, the money you invest in a market-linked investment and the returns depend on the performance of the market. At present, the interest rate of NPS is 8-10% on the amount you invest.

It is open to all employees from the public, private and even the unorganised sector except for people who work in the armed forces. The National Pension Scheme can be extended for ten years once the person turns 60 years old.

Top Performing National Pension Schemes

Scheme NAV 1 day 1 month 3 months 6 months Year 3 Years 5 Years
ICICI PRUDENTIAL PENSION FUND SCHEME C - TIER II 31 -1.58% -1.30% -3.00% -2.40% 0.60% 7.00% 7.20%
LIC Pension Fund Scheme - State Govt. 31 -1.82% -1.50% -3.20% -4.10% 0.20% 7.00% 7.30%
SBI PENSION FUND SCHEME - STATE GOVT 31 -1.13% -0.70% -2.30% -3.10% 1.00% 7.30% 7.50%
UTI RETIREMENT SOLUTIONS PENSION FUND SCHEME- STATE GOVT 31 -1.45% -1.10% -2.70% -3.60% 0.50% 7.20% 7.50%
SBI PENSION FUND SCHEME C - TIER II 30 -2.04% -1.70% -3.40% -3.50% -0.50% 6.40% 6.80%
SBI PENSION FUND SCHEME G - TIER I 30 -3.36% -3.10% -5.30% -6.00% -3.10% 5.50% 6.50%
UTI RETIREMENT SOLUTIONS PENSION FUND SCHEME C - TIER I 30 -0.48% 0.00% -2.10% -1.80% 1.10% 8.60% 7.00%
NPS Lite Scheme - Govt. Pattern 29 -1.90% -1.50% -3.10% -3.90% 0.40% 7.30% 7.60%
NPS TRUST A/C-SBI PENSION FUNDS PRIVATE LIMITED- NPS LITE SCHEME - GOVT. PATTERN 29 -1.85% -1.60% -3.00% -3.70% 0.40% 7.00% 7.40%
NPS TRUST A/C-UTI RETIREMENT SOLUTIONS LIMITED- NPS LITE SCHEME - GOVT. PATTERN 29 -1.20% -0.90% -2.50% -3.20% 0.90% 7.30% 7.60%

Advantages of the National Pension Scheme

NPS offers great market returns and a premature withdrawal facility. This feature makes it an attractive pension scheme. Here are the benefits of the National Pension Scheme: 

  • The National Pension Scheme has a 0.01% management cost.
  • NPS is linked with the market, and the returns are huge as compared to the market linked schemes.
  • NPS offers relaxed investment options. Investors choose a fund manager and can change the manager once during a financial year.
  • As an investor, you can also define what assets they want to be allocated. Also, the asset allocation changed twice during a fiscal year.
  • Except for the armed forces, people from all backgrounds can invest in this scheme.
  • You can access all the important information anytime.
  • NPS scheme is just a one-time transfer of the superannuation amount to NPS without any liability of tax.
  • You can invest several times after taking retirement.
  • You can invest till the age of 70 years.
  • If you want, as an investor, you can choose to not withdraw till 70 years of age. However, if the entire invested amount is lower than Rs. 200,000, then the investor can withdraw the complete amount at 60 years of age.
  • After the death of the investor, the designated nominee will receive the complete amount invested.

National Pension Scheme Returns

A national pension scheme does not offer a fixed interest rate. NPS provides a promising return based on the market performance of the funds as the investments are made in market-linked securities. Also, the NPS contribution can be made in four different asset classes: equities, government bonds, corporate bonds and other alternative assets. Also, the returns offered depend on the market performance of the stocks and bonds.

National Pension Scheme Tax Benefits

The national pension scheme offers tax exemption on the NPS contribution you made under the scheme. The maximum limit of tax exemption is Rs. 1.5 lakh. In this NPS scheme, the contribution made by the employee and the employer is applicable for tax exemption. The Sections applicable under the Income Tax Act, 1961 are as follows: 

80CCD(1)

This is a part of the self contribution. The maximum deduction is 10% of the salary, which can be claimed for the exemption of tax. Further, for people who are self-employed, the limit is 20% of the gross income. 

80CCD(2)

This section covers the contribution made by the employers toward the NPS scheme. However, it is not applicable to self-employed taxpayers. Under this section, the maximum amount allowed for tax exemption is the lowest of the:

  • Real NPS contribution made by the employer
  • 10% of Basic + Dearness Allowance
  • Gross total income

Further, you can claim additional self contribution under Section 80CCD(1B) as a National Pension Scheme tax benefit.

Fees and Applicable Charges of the National Pension Scheme

The NPS fees and charges are divided into various categories, as explained below:

Category 1: Central Record Keeping Agency (CRA)

Charge head 1 For Private For Government
Permanent Retirement Account (PRA) Opening charges For physical PRAN card NCRA Rs. 40 KCRA Rs. 39.36 For ePRAN card NCRA Rs. 35 (Physical welcome kit) / Rs. 18 (Welcome kit via email) KCRA Rs. 39.36 (Physical welcome kit) / Rs. 4 (Welcome kit via email)
Maintenance cost of PRA (Annually) For physical PRAN card and ePRAN card NCRA: Rs. 69 KCRA: Rs. 57.63
Transaction charges For physical PRAN card and ePRAN card NCRA: Rs. 3.75 KCRA: Rs. 3.36

Note: The reduction charges will be applicable on the current charge structure and exclude all the applicable taxes that will be applicable after the release of the functionalities by CRAs to choose NPS subscribers to either have physical or ePRAN cards.

Category 2: Point of Presence (POP) 

Charge head For Private
Initial contribution during registration For Private: Rs. 200
Additional transactions For Private: 0.25% of the contribution Min. Rs. 20 Max. Rs. 25000 For non-financial it is Rs. 20
Persistency For Private: Rs. 50 per annum
Less than 6 months and contribution of Rs 1000 For Private: Rs. 50 per annum
eNPS Contribution For Private: 0.10% of contribution Min. Rs.10 Max. Rs.10000

Category 3: Trustee Bank

No charges

Category 4: Custodian 

Charge head For Private
Asset Servicing charges 0.0032% per annum for the Electronic segment & Physical segment

Category 5: NPS Trust 

Charge head For Private
Reimbursement of Expenses 0.005% per annum

Category 6: Payment Gateway Service Charge (Applicable for transactions made on the eNPS platform)

Mode of Payment Method for quotation rate per transaction Payment Gateway Service Provider
    IndiaIdeas.com Limited (Billdesk)
Credit cards Percentage (%) of transaction value 0.75%
Debit cards Free NA
Internet Banking The flat rate in INR 0
UPI Free NA

Eligibility Criteria of National Pension Scheme

The eligibility criteria are as follows:

  • Every Indian citizen is eligible to open an NPS account.
  • The minimum age eligibility is 18 years, whereas the maximum age is 65 years.
  • The applicant must be KYC compliant.
  • The applicant must not have any pre-existing NPS account.

Types of National Pension Scheme Account

The National Pension Scheme is of two types:

Tier-I Account 

It is a basic pension scheme with withdrawal limitations. The subscriber can only withdraw 25% of the contribution before the age of 60. However, 75% of the contributed amount is used for buying the annuity from a life insurer. 

An annuity means a series of payments made at fixed, regular intervals of time. An annuity is planned in such a manner that the income is given to the person at regular intervals until the death or maturity of the plan. 

After turning 60, almost 60% of the contribution can be withdrawn, and the rest of the 40% is used for purchasing the annuity from approved life insurance.

Tier-II Account 

This savings category is optional, from which the applicant can withdraw money anytime without any limit.

National Pension Scheme Withdrawal Process

The National Pension Scheme Withdrawal Process has three types of withdrawal. They are as follows:

  • Superannuation
  • Premature
  • Death

As a subscriber, you have to initiate an Online Withdrawal request through your NPS account login credentials. 

  • This request needs to be validated and authorised by the associated PoP. 
  • In case you are not able to initiate any online withdrawal request, then you have to submit a physical withdrawal form along with the required documents to the PoP. 
  • Further, on the basis of the request, PoP will initiate an online withdrawal request on behalf of the subscriber.

How to Open a National Pension Scheme Account?

The operations of the National Pension Scheme are regulated by the Pension Fund Regulatory and Development Authority of India. PFRDA provides two processes to open an NPS account. 

Any individual can register and become a subscriber of the NPS scheme through the online e NPS platform or offline process. Here are the steps you must follow:

Offline Process

You have to collect the subscriber form from the nearest PoP and submit it with complete KYC papers. Once the initial investment is made, the point of presence will send you a Permanent Retirement Account Number (PRAN). The PRAN number and password will help you operate the account. Further, the offline process to open the NPS account includes one-time registration fees of Rs. 125. 

Further, NRIs have to follow additional steps to complete the process of registration for the National Pension Scheme.

  • Select the status of the bank account, whether repatriable or non-repatriable.
  • Write the details of the NRE or NRO bank account. Make sure to attest to a scanned copy of the passport.
  • You have to choose an appropriate communicable address, either an overseas address or a permanent address.
  • After you get PRAN, you have to proceed further with the authentication.
  • For the e-sign option, the applicant has to choose the e-sign option from the E-sign/print and courier page.
  • Validate the OTP sent on the registered mobile number.
  • Make sure that the number is linked with your Aadhaar card.
  • After authentication, the registration form is signed successfully.
  • Make sure that a service charge is applicable for NRIs for E-signing the registration form.

Online Process

Opening an NPS account online is easy and hassle-free. You just have to link the account to PAN, Aadhaar and mobile number. Here are the steps you must follow:

  • Visit the official eNPS NSDL website.
  • Select the type of subscriber from the given options.
  • Select the residential status and your nationality.
  • Choose the Tier 1 account type or both NPS Tier 1 and Tier 2 accounts as it is important for long term saving.
  • Fill in the PAN details and select a suitable PoP or bank.
  • Press on the registration option and select the register with the Aadhaar option.
  • Enter your Aadhaar details and generate the OTP.
  • Validate the OTP sent on your registered mobile number.
  • Enter other personal details as asked.
  • Submit the application. You will receive a Permanent Retirement Allotment Number (PRAN).
  • Submit your e-signature, photograph and OTP sent to your registered mobile number.
  • Again validate the OTP and your signature.
  • Pay the fee.
  • After the payment is made successfully, your permanent retirement account will be generated.

CNPS Against Other Tax Saving Investments: A Comparison

Apart from NPS, the other tax-saving investments under Section 80C are PPF (Public Provident Fund), ELSS (Equity Linked Savings Scheme) and tax-saving FDs (Fixed Deposits). Here is a table representing the interest rate, maturity time and risk in all these investments. 

Investment Type Rate of Interest Lock-in Period Risks
NPS 9%-12% Till the age of retirement Depend on Market Conditions
ELSS 12%-15% 3 years Depend on Market Conditions
PPF 8.1% (Guaranteed) 15 years No risk
FD 7-9%(Guaranteed) 5 years No risk

Clearly, NPS earn higher returns compared to other tax-saving schemes. However, NPS is not that tax-effective at the time of maturity compared to other schemes. Its risks also depend on current market conditions.

Who Should Invest in a National Pension Schemes?

  • Any Indian citizen between 18 years and 60 years of age is eligible to open the National Pension Scheme.
  • The NPS scheme is best for individuals who cannot decide their asset allocations or are unable to manage investments.
  • An NPS scheme is backed up by the government, and anyone who wants to plan their retirement early with minimal risk should choose it.
  • Any salaried person who wants the tax benefit of 80C deductions must consider the National Pension Scheme.

National Pension Scheme Fund Managers

A total of 8 fund managers manage the deposits of NPS subscribers to maximise the returns:

  • LIC Pension Fund Ltd
  • UTI Retirement Solutions Ltd
  • Birla Sun Life Pension Fund Ltd
  • HDFC Pension Management Co. Ltd
  • ICICI Prudential Pension Fund Management Ltd
  • Kotak Mahindra Pension Funds Ltd
  • Reliance Capital Pension Fund Ltd
  • SBI Pension Fund Pvt. Ltd

Difference Between NPS Tier-I And Tier-II Account

The National Pension Scheme allows every Indian citizen to make periodic investments. However, there is no issue with liquidity. To enjoy more benefits, the subscriber is required to have an NPS Tier-1 or NPS Tier-2 account along with a PRAN (Permanent Retirement Account Number).

Tier-1 Tier-2
It works as a pension account. It works as a voluntary account.
Withdrawals are subject to specific restrictions Tier-2 provides liquidity of funds via investments and withdrawals.
It can be opened with Rs. 500 as minimum deposit. The minimum deposit require is Rs. 250
There is no such requirement to open a Tier 1 account. Tier-I needs to be active to open a Tier-II account

Types of Funds in the National Pension Scheme in India

Here is a tabular representation of classes of funds:

Types Of Fund Invested In the Following Average Risk in these Investments Return Since Launch (%)
E Index-based Stocks Depend on market risk like any large-cap equity fund 3.79%
C Bonds issued by State Govt, PSUs and Private Firms Depending on the quality of companies, the risk factor will vary. 8.66%
G Bonds issued by Central Govt. Decreases the risk but nor for long term bonds 5.92%

How ready the investor is to take a risk classifies the three fund classes. Disclosure to equity is not more than 50%. However,  if it is an unspecified allocation, the equity is further decided on the basis of age. 

The figures shown in the table represent the average performance of the NPS funds in different types. 

Here's a table representing mixed investment according to the age of the investor:

Investor's Age Investment Percentage in Various Classes
Up to 35 Years 50% of Equity and 50% of Debt
40 Years 40% of Equity and 60% of Debt
45 Years 30% of Equity and 70% of Debt
50 Years 20% of Equity and 80% of Debt
55 Years 10% of Equity and 90% of Debt

 With the increasing age, the investment corpus increases towards the debt.

National Pension Scheme Account for NRI

The National Pension Scheme is available for Non-Residential Indians. They can open their NPS account and enjoy their benefits. This scheme is a retirement scheme launched by the government of India to secure the life of a financially self-dependent person. But there are some criteria that NRIs who want to open an NPS account have to follow.

  • The age of the NRI must be between 18 years and 60 years.
  • The individual must complete all the KYC norms.
  • The most prominent rule is that the amount invested must come from either an NRO or NRE account.

Features and Benefits of an NPS Account for NRI

The National Pension Scheme is specifically designed to empower retired people financially. They offer several features that make the scheme risk-free and secure. Here are the benefits and features of the National Pension Scheme Account for NRI:

  • The National Pension Scheme comes in two different forms: NPS Tier 1 and Tier 2.
  • NPS Tier 1 is known as a pension account where it is mandatory to invest until it gets mature. Once it gets mature, you can enjoy all the benefits.
  • NPS Tier 2 is all about an investment account under which the amount invested can be withdrawn anytime.
  • NPS Tier 1 offers all tax benefits, whereas NPS tier 2 does not offer any tax benefits.
  • The minimum amount required to open an account in Tier 1 is only Rs. 500. On the other hand, under NPS Tier 2, the minimum amount is Rs. 1,000.
  • In a year, the total minimum payment under Tier 1 can be only Rs. 1,000 (minimum amount per payment is Rs. 500). However, in Tier 2, there is no requirement for a total minimum payment in a single year. But the minimum amount per payment is Rs.250.
  • Under Tier 1, the partial withdrawal feature is available. After a lock-in period of 3 years, you can withdraw 25% of the invested amount at once. You can withdraw the amount a maximum of 3 times during the complete tenure of the scheme.
  • The exit option under Tier 1 states that a minimum of 40% of the total amount invested should go for the annual scheme. However, the remaining 60% sum can be withdrawn easily.
  • The exit option under Tier 1 states a minimum of 40% of the total invested amount. The remaining 60% can be withdrawn.
  • 40% of the withdrawn amount is tax-free.
  • If you want, you can also withdraw the amount before the age of 60 years but ensure that it is ten years after the commencement of the scheme.
  • From the total amount, 20% can be withdrawn in the form of a sum, while the leftover 80% will go to the scheme.

Frequently Asked Questions (FAQs)

Can I have two National Pension Scheme accounts?

No, one individual is only allowed to have only one NPS account.

How can we exit from the National Pension Scheme system?

Login to your account, and from the Exit from the NPS menu, select the Request for Deferment option. Enter the details and submit a Continuation request. This is how you can exit from the NPS system. Another method is you can visit the nodal office/POP and submit the request.

Which NPS bank is best?

SBI Pension Fund is the best.

What are the NPS tax benefits?

As per the Income Tax Act 1961, under Section 80CCD (1), individual subscribers of the National Pension Scheme are eligible for tax benefits up to 10% of the gross income up to Rs. 1.50 lakh under Section 80CCE.

Further, Tier 1 subscribers are eligible for additional tax benefits. This falls under Subsection 80CCD (1B). All the subscribers can even have a deduction of Rs. 50,000 on the investments made in the NPS scheme.

What are the pros and cons of the National Pension Scheme?

The pros of NPS are you can withdraw 25% of your total NPS contribution from Tier 1 after a minimum of 10 years of contributions. The con is that only three such withdrawals are allowed. Further, there should be a gap of 5 years between every two withdrawals.

How does the National Pension Scheme (NPS) work?

The National Pension System encourages Indian citizens to invest in a pension scheme at regular time intervals during their employment. And once they are retired, they are eligible to take out a certain percentage of the amount and receive the leftover amount in the form of monthly instalments after retirement.

Which one is better, the NPS or the LIC pension scheme?

NPS is considered the best because of its higher returns. LIC pension scheme only offers Rs. 1,000 as annuity amount.

How can I pay the National Pension Scheme online?

You can contribute to NPS online using two ways. You can either use eNPS online or NPS mobile app.

What is the lock-in period for NPS?

The lock-in period for Tier 1 is 60 years of age for the subscriber. However, for Tier 2, there is no lock-in period.

What are the minimum contribution amounts for Tier I and Tier II accounts?

The minimum amount for Tier 1 is Rs. 500, and for Tier 2, it is Rs. 1,000 at the time of registration.

How many subscribers does the National Pension Scheme have?

As of April 2022, there are 523.87 lakh subscribers in various schemes under the National Pension Scheme. NPS experiences a 22.76% rise in subscribers every year.

What is the maturity period of the National Pension Scheme?

The maturity period of NPS is the time when the subscriber reaches the age of 60 years.

What is the eligibility for NPS?

Every Indian from 18 years of age to 65 years of age is eligible for the National Pension Scheme.