National Pension System (NPS) An Overview

National Pension System (NPS) was launched in January 2004 for government employees. However, the government of India has rolled out NPS for all citizens of India with effect from May 1, 2009. National Pension System (NPS) is a pension scheme, offered by the government of India, which is especially designed for getting fixed monthly pension after retirement. Both the salaried as well as self-employed get income tax benefits on investing in NPS.

In this scheme, the subscribers make systematic savings during their working life to save for their future life. On retirement, they can withdraw a portion of the corpus in a lump sum and use the remaining corpus to buy an annuity to get a regular pension after retirement.

Many Points of Presence (POPs) have been appointed by the PFRDA to provide the facilities to open NPS account and other services related to NPS. These POPs have designated branches to carry out the NPS activities which are called as Point of Presence- Service Providers (POP-SPs).

Type of NPS Accounts & PRAN

When you open NPS account, you will be provided with a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with you throughout your lifetime and will not change ever.

NPS system has following two types of NPS accounts:

  1. Tier-I Account: This "Pension Account" is a non-withdrawable mandatory Account in which the accumulations are deposited and invested as per the investment option selected by the subscriber.
  2. Tier-II Account: This "Voluntary Account: is a withdrawable account which you can open only when you have an active Tier I account. Just like the savings account, there in no restrictions on the number of withdrawals from this account. However, you cannot claim any income tax rebate on the investment made under this account.

Minimum Contribution in NPS

Subscriber has the option to make the contribution in any mode lump sum, monthly, quarterly, half yearly or yearly. Mentioned below are the details about Tier I and Tier II contributions:

For All citizens modelTier ITier II
Minimum Contribution at the time of account openingRs. 500Rs. 1,000
Minimum amount per contribution Rs. 500Rs. 250
Minimum total contribution in the year Rs. 1,000N.A.

Working of NPS

Subscriber has the option to make the contribution in any mode lump sum, monthly, quarterly, half yearly or yearly. Mentioned below are the details about Tier I and Tier II contributions:

  • Under the NPS, NPS account holders' contributions are pooled in a pension fund.
  • After that Pension Fund Regulatory and Development Authority (PFRDA) regulated professional Pension Fund Managers (PFMs) invest these funds in the diversified portfolios comprising of government bonds, corporate debentures and equities as per the approved investment guidelines.
  • These contributions would grow and accumulate over the period of investment on the basis of the returns earned on the investment made.
  • At the time of a exit from NPS on retirement, the subscribers have following 2 options:
    1. They can use full accumulated pension corpus to purchase a life annuity from a PFRDA-registered Annuity Service Provider (ASM), which is the life insurance company
    2. They can withdraw a part (maximum 40%) of the accumulated pension corpus as lump-sum and purchase a life annuity, of rest of the funds, from ASM
  • The annuity will be generated by the Annuity Service Provider to provide monthly pension after your retirement. There are various annuity plans offered by insurance companies, subscribers can choose any of them
  • NPS Tax Benefits

    Like PPF and EPF, NPS is an EET (Exempt-Exempt-Exempt) instrument. Contributions to NPS get tax exemptions under Section 80C, Section 80CCC and Section 80CCD(1) of Income Tax Act. With effect from FY 2015-16, an additional tax benefit of Rs 50,000 under Section 80CCD(1B) is provided under NPS, which is over the Rs 1.5 lakh exemption of Section 80C.

    Employer co-contribution is also tax free income in hands of employees under Section 80CCD(2), which can be up to 10% of (Basic and DA) without any upper cap.

    On retirement, the account holder can withdraw 60% of the NPS corpus which will be fully tax-free. Rest 40% of the NPS corpus is to be compulsorily used to purchase an annuity, which is taxable at the applicable tax slab.

    There is no tax benefit under Tier II investments for subscribers, however, w.e.f. April 1, 2019, Central govt. employees who contribute under Tier II account, can claim tax deduction under section 80C (maximum limit Rs. 1.5 lakhs) with a lock-in period of 3 years.

    Important Points: NPS

    • Total number of subscribers stands at 1.24 crore as of March 2019
    • NPS AUM (assets under management) is Rs 3,11,353.44 crore as of March 2019
    • Online process of opening NPS account via eNPS has been introduced by NSDL e-Governance in 2015
    • After the NPS account is opened, CRA mails a "Welcome Kit" to the subscriber containing the subscriber's Permanent Retirement Account Number (PRAN) Card
    • Minimum contribution per year under Tier I account is Rs 1,000 and if the subscriber contributes less than Rs. 1000 in a year, his/her account would be frozen and further transactions will be allowed only after the account is reactivated