The National Pension Scheme is an investment scheme initiated by the central government of India, which is open for all salaried employees from the private, and public sector, except for the armed forces. The scheme is also open to the unorganised sectors. The main objective of this initiative is to encourage the people to save and invest a part of their income towards their pension account during their active working years.

Post-retirement, the investors can withdraw a part of their accumulated savings, and the remaining amount is given to them as a pension fund every month. Initially, the NPS was launched only for the employees working in a central government organisation. But, today, the PFRDA has opened the scheme for all salaried employees who need a regular income after retiring from active work. The best thing about this scheme is that it is portable, which means that you can continue the account irrespective of whether you switch jobs or move to a different location.

Features and benefits of National Pension Scheme

Valuable returns

A certain part of your investment in NPS is diverted to equities. Although this does not guarantee returns, the NPS returns earned from equities are higher than the traditional, and tax-saving investment tools like the fixed deposit or the public provident fund. The NPS has been in effect for more than ten years, and it has a good history of providing annual returns of about 8% to 10%. If you have invested in an NPS, it is your prerogative to change the fund manager at any time if you are not happy with your fund's performance.

Assessment of risks

Currently, as per the PFRDA (Pension Funds Regulatory and Development Authority) mandate, there is a cap of 50% to 75% on exposure to equities for the investment in National Pension Scheme India. If you are a government employee, the permissible cap is 50%. The prescribed range will start to reduce by 2.5% every once you attain 50 years. However, if you are equal to 60 years or more, the cap is 50%. One of the major advantages of this is that it balances the equation of risks and returns for the investors, which means your corpus will remain unaffected by the market volatility.

Tax-efficient investment tool

As per the NPS rules, you can claim a tax deduction up to Rs. 1.5 lakhs on your investment in NPS. You can claim the deduction on the amount you contribute as well as on the amount contributed by your employer.
  • Section 80CCD(1), which is part of the Section 80C covers the tax-deduction for self-contribution. The maximum deduction you can claim under this section is 10% of your salary, but the maximum deduction you claim cannot be more than 1.5 lakhs. If you are a self-employed professional, the limit is 20% of your gross income.
  • Section 80CCD(2) cover the employers' contribution towards the NPS. This benefit is available only for the salaried employees; self-employed professionals cannot claim this deduction. The maximum amount eligible for deduction is either 10% of the basic salary + the gross total income or the actual contribution of the employer towards the fund, whichever is lower.
Apart from the tax deduction under the sections as mentioned above, you can claim an additional tax benefit for self-contribution up to Rs. 50,000 under section 80CCD(1B) as NPS tax benefit. Thus, investment in NPS allows you a tax deduction up to Rs. 2 lakhs.

Only partial withdrawal is allowed after you attain retirement age

A lot of people have wrong notions about how NPS works. It is the general belief among the people that you can withdraw the entire corpus from the NPS when you attain the retirement age. However, the truth is that you can only withdraw a maximum of 60% of the accumulated corpus. You must compulsorily keep at least 40% of the investment to receive a regular pension from an insurance company that is registered with PFRDA. The 60% of the corpus you withdraw is exempted from tax.

Specific rules to be followed for an early exit and withdrawal

Since NPS is a long-term investment, it is paramount that you continue to invest in the funds until you attain the retirement age. However, if you have invested in NPS for three years, you can withdraw up to 25% of the accrued corpus. However, you must know that the withdrawal is allowed only for certain specific purposes like buying or building a new home, paying medical bills, children's marriage or funding child's education. Throughout the tenure of the NPS, you can make three withdrawals, but there must be a gap of five years between each withdrawal.

What is the interest rate on the returns earned under NPS?

Unlike other investment tools like fixed deposit schemes, the recurring deposit schemes or the PPF, NPS does not offer any specific interest rate due to its various investment options; the interest rate on the returns depend on the market condition. However, the interest rate offered under NPS can be anywhere between 11% to 15% or more depending on the investment option you choose. It is generally projected that the investment in NPS scheme earns handsome returns, but there is no interest range figure as such.

Opening an NPS account

The PFRDA regulate the operation of NPS, and it has set certain NPS guidelines. You can open an NPS account both online and offline. Let us look at the process of opening an account.
  • Offline

    To open an NPS account manually or offline, you must first find a PoP or Point of Presence. This could be any financial institutions that offer NPS investment scheme. Collect the subscriber from the Pop and submit it along with the Know Your Customer (KYC) papers and the necessary documents. Once you have made the first payment in your NPS account (not less than Rs. 250), the pope will send you a Permanent Retirement Account Number or PRAN along with the password to your account in a sealed kit, which will help you access your account. You must keep the PRAN safe as you would need it every time you access your account. Also, remember, when you open an NPS account offline, you would have to pay a one-time registration fee, which usually is about Rs. 100 to Rs. 200.
  • Online

    You can open an NPS account online. The process is less tedious than offline. To open an NPS account online, you must visit the NSDL website. If you link your PAN card, Aadhaar card or mobile number to your account, you can validate the registration using the OTP sent on your registered mobile number. After you validate, a PRAN will be generated, which you can use to login your account. Once the PRAN is generated, you can check your national pension scheme details at any time you want.

Types of account available under NPS

Currently, the government offers three types of accounts under the National Pension Scheme.

Tier 1 NPS Account – All central government employees are mandated to contribute 10% of their basic salary towards this type of account. Under the scheme, the subscriber cannot withdraw their funds before they attain retirement age (60 years) and the minimum amount everyone must invest in the Tier 1 NPS account is Rs. 6000 per annum.

Tier 2 NPS Account – This is a voluntary savings account where the subscribers can withdraw their money at any time. However, the minimum amount required to open this account is Rs. 1000 and you must maintain a minimum balance of Rs. 2000 at the end of the year.

Swavalamban Scheme – The government introduced this scheme, especially for the economically weaker section; the government pays Rs. 1000 per year for four years. This scheme is only for the people who are employed in an autonomous body but do not have a regular income.

The investment options available under NPS

Every investor who has invested in NPS has two options – auto choice and active choice for fund allocation. However, before you delve into these options, you must first know the asset classes under the NPS investments.

• E – This symbolises investment in stocks and the maximum limit for investment in stocks is 50%

• C – This means invest in corporate debt funds

• G – This means investing in gilt funds in government securities

Let us look at the investment options available

• Active choice – if you choose this option, you have the liberty to choose the percentage of contribution in different asset classes based on your risk appetite.

• Auto choice – if you choose this option, the funds will be automatically managed by the authority based on your age

Withdrawal options for employees who take voluntary retirement

If you are a government employee and have invested in NPS, then a minimum of 80% of the corpus must be invested in the annuity. But if the accumulated pension is less than Rs. 10 lakhs, you can withdraw the entire amount. If you are not a government employee, then the same withdrawal rules apply for you. But, additionally, you must maintain the account for a minimum of 10 years.

Learn more about your Pension Plans here.


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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