National Pension System
The National Pension System (NPS) is a voluntary, long-term retirement savings scheme launched by the Government of India in 2004. The National Pension System(NPS) aims to provide retirement income to all citizens of India, including those in the unorganized sector, who may not have access to formal pension schemes. It allows individuals to contribute regularly towards their pension during their working life.
NPS Account
This is the dedicated retirement account where you make regular contributions, which are then invested based on your chosen scheme/fund manager.
40% Taxable Annuity
Key Features
National Pension System Details are as follows :-
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(I) Voluntary participation : Individuals can voluntarily enroll in the NPS and contribute towards their retirement savings.
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(II) Tiered structure : The NPS has two tiers - Tier I and Tier II. Tier I is a mandatory pension account with restrictions on withdrawals, while Tier II is a voluntary savings account with greater flexibility in withdrawals.
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(III) Tax benefits : Contributions made to the NPS Tier I account are eligible for tax benefits under Section 80CCD of the Income Tax Act, providing individuals with incentives to save for retirement.
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(IV) Choice of investment options : NPS subscribers can choose between different investment options, including equity, government securities, corporate bonds, and alternative investment funds. This allows subscribers to tailor their investment strategy based on their risk appetite and retirement goals.
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(V) Maturity : Upon reaching the retirement age, subscribers can withdraw a portion of their accumulated savings as a lump sum and use the remaining amount to purchase an annuity. Up to 60% is tax-free; annuity pension is taxable unless corpus is under ₹2,00,000.
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(VI) Premature Withdrawal : Premature withdrawal is not available under Tier I account. Partial withdrawal is allowed only in special circumstances and conditions.
Additional Tax Benefits
Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B) : An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.
Apart from tax benefits available under 80CCD, below are the other tax benefits available under NPS :
- (I) Tax benefits Maturity - Upon reaching the retirement age, subscribers can withdraw a portion of their accumulated savings as a lump sum and use the remaining amount to purchase an annuity. Up to 60% of the total corpus withdrawn in lump sum is exempt from tax.
(II) Tax benefit on Annuity purchase Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.
Types of Accounts
NPS scheme is structured into two tiers
Tier-I NPS account
This is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer are credited and invested as per the scheme/fund manager chosen by you.
Tier-II NPS account
This is a voluntary / optional withdrawable account which is allowed only if you have an active Tier-I account. Withdrawals are permitted as and when required.
| Tier – I Account | Tier – II Account |
|---|---|
| Individual Pension Account | Optional Account and requires an active Tier-I Account |
| Withdrawal as per Exit & Withdrawal rules and regulations | Unrestricted withdrawals |
| Minimum contribution to open is Rs.500/- | Min. Contribution to open is Rs.250/- |
| Min. Contribution per year is Rs.1000/- | There’s no restriction on min. Contribution per year |
| AMC charges applicable | No separate AMC charges applicable |
| - | Anytime switching to Tier-I allowed |
You need to choose the asset classes as well as the Pension Fund Manager (PFM) along with the percentage allocation to be done in each scheme.
There are four asset classes from which the allocation is to be specified under a single PFM:
(i) Asset Class E – Equity and related instruments
(ii) Asset Class C – Corporate debt and related instruments
(iii) Asset Class G – Government Bonds and related instruments
(iv) Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITs, AIFs, InvITs etc.
While choosing the asset class, subscribers must note that:
(i) Percentage contribution value cannot exceed 5% for Alternative Investment Funds
(ii) The total allocation across E, C, G and A asset classes must be equal to 100%.
(iii) For Tier-II, you can allocate 100% to Equity.
(iv) For Tier-I, you can allocate up to 75% to Equity.
Active Choice
Under Active Choice, you can plan and choose how your contribution is to be invested. You can choose the PFM, the scheme(s) as well as the percentage allocation in the asset classes.
| Asset Class | Maximum allocation of investment in the asset class |
| E | Up to 75% |
| C | Up to 100% |
| G | Up to 100% |
| A | Up to 5%. Note: Investment in Asset Class A is available only for NPS Tier-I account. |
Auto Choice
NPS offers an easy option for you to invest in a Life-cycle fund in which the proportion of funds invested across three asset classes is determined by a pre-defined portfolio and would change as per your age.
As age increases, your exposure to Equity and Corporate Debt tends to decrease under Auto Choice. Depending upon your risk appetite, there are three different options available within ‘Auto Choice’ – Aggressive, Moderate and Conservative.
(i) LC75 – Aggressive Life Cycle Fund
(ii) LC50 – Moderate Life Cycle Fund
(iii) LF25 – Conservative Life Cycle Fund
Frequently Asked Questions (FAQs)
Yes, the nomination is mandatory. You can appoint up to 3 nominees for both NPS Tier 1 and Tier 2 Accounts.
Normal Exit on Superannuation
- 100% Lump sum withdrawal allowed if the corpus is <= 5 Lakh.
- If the corpus is >5 Lakh, at least 40% of the corpus to be utilized for purchase of an Annuity and balance 60% is paid as lump sum.
Premature Exit
- 100% Lump sum withdrawal allowed only if the account is more than 5 years old and the corpus is <= 2.5 Lakh.
- If the corpus is > 2.5 Lakh, at least 80% of the accumulated pension wealth must be utilized for purchase of an Annuity.
- The balance 20% is paid as lump sum to the Subscriber.
The entire accumulated pension wealth is payable to the nominee or legal heirs. Nominees can opt for annuity if desired.
If death occurs before due date of purchase of an annuity, the entire accumulated pension wealth is paid to the nominee(s) or legal heir(s).
Upon exiting Tier-I, the Tier-II account is automatically closed, and the remaining amount is paid to the subscriber, nominees, or legal heirs.
Yes — eligible for exit in case of physical incapacitation or disability leading to inability to continue under NPS.
Disability certificate from a government surgeon/doctor stating nature, extent and certification of inability to perform duties; disability percentage >= 75% as certified.
You will continue to remain subscribed to the NPS up to the age of 75 (seventy-five) years.
Yes — the subscriber may purchase an annuity at any point during the deferment period by submitting a request to NPS Trust or an authorized intermediary.
- Higher education or marriage of children
- Purchase or construction of residential property (excluding ancestral property)
- Treatment of specified illnesses including cancer, kidney failure, stroke, etc.
- Medical and incidental expenses due to subscriber's disability or incapacitation
- Expenses for skill development, self-development, or starting ventures/start-ups (per Authority guidelines)
Disclaimer :
(i) The FAQs above are sourced from https://www.npstrust.org.in/faqs. For detailed information, refer to the source link.
(ii) Investments in the National Pension System (NPS) are subject to market risks. Please review all associated documents before making investment decisions.