The National Pension Scheme (NPS) is a retirement savings scheme initiated by the Government of India in 2004 that allows individuals to save for their retirement. The investor makes regular contributions to their pension account and is eligible to avail of various tax benefits under Income Tax Deductions. The account is administered by the Pension Fund Regulatory and Development Authority (PFRDA). Initially, the National Pension Scheme was only available to employees of the Central Government. However, later in 2009, the NPS scheme was opened to all sectors.
With NPS contribution, one can build a stable source of income for their retirement along with achieving high interest and tax benefits.
- What is National Pension Scheme (NPS)?
- Features of NPS Scheme
- Types of NPS Account
- What is NPS Withdrawal Process?
- Rules of Equity Allocation under NPS Scheme
- Difference between NPS Scheme and other Tax Saving Schemes
- NPS Deductions on Taxable Income
- How to open an NPS Account?
- Benefits of NPS
- What Documents are Required to Open an NPS Account?
- FAQs
What is National Pension Scheme (NPS)?
National Pension Scheme (NPS) is a voluntary pension scheme offered by the Government. Under this scheme, investors can make voluntary contributions to build a corpus for their retirement. It ensures individuals live with dignity and without compromising on their standard of living during their retirement phase. Hence, it aims at providing financial security and stability.
As per the NPS scheme, individuals invest in their pension accounts at regular intervals during their employment period. For the purpose of providing social security/welfare to the employee, even the employer can co-contribute to the retirement account with the employee.
At the time of maturity, the investor can withdraw a specified amount of the corpus after retirement, and the remaining amount will be receivable as a monthly pension.
The objectives of this scheme are:
- Provide income during retirement
- Provide returns comparable to the market over the long run
- Act as a security cover for old age citizens
Features of NPS Scheme
- Eligibility: Individuals (residents or NRIs) between the age of 18-60 years can do an NPS contribution and invest in the NPS scheme. They can join the scheme either as individuals or as an employee-employer group(s) (corporate) subject to the submission of all required information and Know your customer (KYC) documentation.
- Individuals cannot contribute post the age of 60 years.
- Registration cost: Individuals have to pay INR 400 (exclusive of taxes) for registration of NPS account.
- NPS contribution: The minimum NPS contribution per year is INR 500 in Tier 1 (exclusive of taxes) and INR 1000 in Tier 2. While there is no upper limit on NPS contribution per year, any investment above the threshold limit will not qualify for the deduction under income tax act.
- Number of Contributions: Investors have to make at least one contribution in a year.
- Payment Mode: Payments can be done via Demand Draft (DD), Cheque, or Cash.
Types of NPS Account
Tier I and Tier II are the two main account categories under NPS Scheme. Tier I is the default account while Tier II is a voluntary addition. Hence, one can’t hold a Tier II account unless they have a Tier-1 account.
The below table explains the accounts in detail:
| Particulars | NPS Tier I Account | NPS Tier II Account |
| Minimum NPS contribution to open an account (initial contribution) | INR 500 | INR 1,000 |
| Minimum NPS Contribution p.a. | INR 1000 | INR 250 |
| Minimum Amount per Contribution | INR 500 | INR 250 |
| Maximum NPS Contribution p.a. | No Limit | No Limit |
| Withdrawals | withdrawal is restricted | withdrawal is not restricted |
| Tax Benefits | Tax deduction of up to INR 2 lakh p.a. u/s 80C & 80CCD | INR 1.5 lakh for Government Employees Other employees – NA |
| Status | Mandatory to open | Voluntary |
Note: It is important that an investor maintains a minimum balance of INR 6000 at the end of the Financial Year in Tier I account. There was a minimum balance requirement of INR 2000 in the Tier II account but that has been removed by PFRDA in 2016. Hence, there are no minimum balance requirements for Tier II accounts now.
What is NPS Withdrawal Process?
NPS Withdrawal after attaining the age of 60 years
As we know, the investor cannot withdraw the investment before the age of 60 years. Post attaining the age of 60 years, the investor can withdraw maximum 60% lump sum which will be exempt from tax. However, it is mandatory that investor retains at least 40% of investment in order to receive pension which will be taxable in the hands of investor under ‘income from other sources’.
NPS Withdrawal before attaining the age of 60 years
In usual cases, since NPS is a pension scheme, investors cannot withdraw before attaining the age of 60 years. However, the investor can make an early withdrawal of up to 25% of the investment under certain circumstances provided that they have invested towards their account for 3 years. Below mentioned are the circumstances under which early NPS withdrawal process is allowed:
- In case of high education of children
- In case of marriage of children
- For the purchase or construction of their house/flat
- For medical treatment of illness of investor or their family members
Early withdrawal scheme allows for a maximum of 3 withdrawals and there must be a gap of minimum 5 years between each withdrawal.
Rules of Equity Allocation under NPS Scheme
National Pension Scheme invests in several schemes one of them being equity. The significant benefit that comes with investing in NPS scheme is that it allows its investors the freedom to select between two choices:
- Active Choice: Under active choice, the investors can choose the investment options and the money split.
- Auto-choice: Under auto-choice, investment decisions are managed by a fund manager who takes into account your age and risk appetite.
Note: Maximum amount that can be invested in Equity is 75% of your total investments.
Difference between NPS Scheme and other Tax Saving Schemes
The below table explains the difference between various investment schemes based on different criteria:
NPS Deductions on Taxable Income
Below are the details for NPS deduction in case of salaried individuals and self-employed individuals:
Deduction for Salaried Individuals:
| Category | Section | Tax Benefits |
| Own Contribution | Section 80CCD(1) | 10% of Salary up to INR 1.5 lakh |
| Employer Contribution | Section 80CCD (2) | 10% of the salary in case of other employees and 14% of the salary in case of central government employees |
| Additional Contribution | Section 80CCD(1B) | This section was introduced in 2015, in order to provide an additional deduction of up to INR 50,000 on the amount contributed to NPS |
Deduction for Self-Employed Individuals:
| Category | Section | Tax Benefits |
| Own Contribution | Section 80CCD(1) | 20% of Gross Annual Income up to INR 1.5 lakh |
| Additional Contribution | Section 80CCD(1B) | INR 50,000 |
Note: The tax benefits are available only in the case of the Tier I account and not in the Tier II account.
How to open an NPS Account?
An individual can open an NPS account in two different ways i.e., Online & Offline
Online Process
The steps for online registration are:
- Go to eNPS website and select new registration
Choose Aadhaar or PAN as an option to perform the KYC verification
- Enter Aadhaar / PAN details
Enter the OTP to start the registration process
- Fill up all the mandatory details
Along with other details, you will have to upload your digital photograph and scanned signature
- Make a payment towards NPS account
You can do this using your Debit/Credit Card or Internet Banking
- If you started the registration process via Aadhaar
You can eSign your application and complete the registration process. No need to send the physical copy of a form to CR
- In case you chose PAN
Finally, you need to select ‘Print & Courier’ option, take the print out of the filled form, affix your photograph and send it to NSDL e-Governance Infrastructure Limited.
Offline Process
You can also do this offline by submitting the form and KYC documents in person:
- Download Permanent Retirement Account Number (PRAN) Application Form
- Fill in the mandatory details, affix the photograph and signature & scheme preference details
- Submit the Application form along with your address proof and ID proof to your nearest Point of presence-Service Provider
- Upon submission, Point of Presence-Service Provider (POP-SP) shall give you receipt number which you can use to track your PRAN Application Status
You have to make the first contribution at the time of applying for registration to any POP-SP. For this, you have to submit NCIS (Instruction Slip) mentioning the payment details.
Note: When you join NPS, you’ll be allotted a Permanent Retirement Account Number- PRAN; a 12-digit unique ID number. In case you misplace your PRAN card or it gets stolen, it can be reprinted with additional charges. further, this unique PRAN can be used from any location in India. However, it is important that you have your PRAN number.
Benefits of NPS
- Risk Evaluation: Currently the equity exposure for NPS ranges between 50% to 75% (maximum 50% in case of government employees). Moreover, when an investor turns 50 years, this equity proposition will decrease by 2.5% every year. The main reason behind this is to ensure investors are not significantly impacted by market volatility.
- Low investments and Higher returns: One can start investing with as low as INR 1000 p.a. (Tier 1) and INR 250 (Tier II). These investments are managed by the pension fund managers and hence, high returns are achievable through this scheme.
- Portability: Even if individuals change their jobs, city, or state, the NPS CRA login or PRAN remains the same.
- NPS deduction: There are various tax benefits under Section 80C and 80CCD.
- Alter the Fund Manager and Scheme: If you are not satisfied with the performance of the NPS scheme, you can change the fund manager or the pension scheme.
What Documents are Required to Open an NPS Account?
Mentioned below is a list of documents:
- Proof of Identity
- Address Proof
- Proof of Date of Birth
- Passport Size photo
- Signature
FAQs
No. Unlike contributions to the Employee Provident Fund, the NPS contribution is completely voluntary. It is up to the employee whether he wants to invest in NPS or not. Even a self-employed person can open an NPS account and make voluntary investments in the account.
The basic difference between both accounts is that withdrawals are not allowed until the investor reaches the age of 60 in the Tier I account, while in Tier II, the investor can withdraw from his balance anytime he wants. Moreover, there are no tax deductions under Tier II while Tier I offers various tax benefits.
There is no cap to the maximum investment limit. However, the investor needs to maintain the below minimum investment in their account.
In Tier I Account:
Minimum contribution p.a.= INR 1000
Minimum amount per contribution= INR 500. Further, the investors are supposed to maintain a minimum balance of INR 6000 in Tier I account at the end of the financial year.
In Tier II Account:
Minimum amount per contribution= INR 250. In Tier II, there is no requirement of maintaining any minimum balance.
Yes, you need to appoint a nominee at the time of opening the NPS account. You can appoint up to 3 nominees for your NPS Tier I and Tier II accounts. However, in case of more than one nominee, you need to specify the percentage of your maturity amount that you wish to allocate to each nominee. The total share percentage across all nominees should aggregate to 100%.
Yes, NRIs between the age of 18-60 years can invest under the National Pension Scheme.
Hi @Swaraj_Mangaonkar
There are certain deductions that you can claim by Investing in NPS (National Pension System)
So, overall you can reduce your taxable income by Rs 2,00,000.
And one can report deductions under section 80C while filing an ITR.
Hope it helps.
Hello @Jigar_Marvaniya
The primary goal of NPS is to provide pension after retirement (saving plan).
NPS accounts are of two types, tier I account and tier II account.
The tax benefits are only applicable to tier-I accounts.
There are multiple PFMs, Investment options (Auto or Active), and four Asset Classes i.e. Equity, Corporate debt, Government Bonds, and Alternative Investment Funds.
Here is an article to know more about it and the process details.
Hope we have addressed your query.
@Muskan_Balar Can I invest only in Tier 2 NPS and not Tier 1 ? May I know the comparison between Tier 1 and Tier 2 account?
Hi @akash_jhaveri
You can open the NPS Tier II account only when you already have a Tier I account.
Hope this helps.
@Muskan_Balar I need to do tax planning with support for 2023-2024, I have a small investment in stocks. Any guidance you may extend. Not sure if we have platform to connect 1-1. Regards
Hi @Sanjay_S
Thanks for connecting on Quicko Tax QnA. Your queries seem to be more related to personalized tax planning.
You can book a MEET where a dedicated tax expert can connect with you over a video call, understand your queries, and suggest you the best possible solutions.