National Pension Scheme- NPS Features & Benefits
Mini Balakrishnan
Planning for retirement is one of the most important financial responsibilities in life. Unlike regular savings, retirement planning ensures that you have a stable income even when your active earnings stop. In India, where there is no government-supported social security system, building your own retirement corpus becomes essential. With nuclear families becoming the norm and life expectancy increasing, individuals must rely on structured retirement plans like EPF and long-term investment options to secure 30–40 years of post-retirement life.
To address this growing need for financial security, the Government of India introduced the National Pension System (NPS)—a government-backed retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Launched for government employees in 2004 and extended to all Indian citizens in 2009, the NPS scheme helps individuals systematically invest and build a retirement corpus while enjoying tax benefits and market-linked growth. Whether you are salaried or self-employed, the National Pension Scheme offers flexibility, long-term wealth creation, and reliable pension income, making it one of the best retirement planning tools in India.
What is the National Pension Scheme (NPS)?
The NPS full form is National Pension System, which is a pension program for anyone interested in establishing a retirement fund or an old-age pension on their terms. All Indian nationals (permanent residents or temporary visitors) between 18 and 65 are eligible to join. Anybody may start contributing to the NPS as late as 60 and keep doing so until age 70.
The NPS benefits all workers, businesses, and independent contractors alike. Employers may choose to provide either NPS or PF to their staff, although workers and independent contractors can sign up for NPS independently. If the employee and the employer agree, the former PF benefits might be transferred to the latter.
How Does NPS Work?
NPS follows a simple structure—monthly or periodic contributions are invested in market-linked instruments like equities, corporate debt, and government bonds.
These contributions grow over time, and upon retirement, subscribers can withdraw a portion as a lump sum while the rest is used to purchase an annuity to generate monthly pension.
Key Features of the National Pension Scheme
Voluntary Participation
Anyone aged 18–70 can join NPS, making it flexible for students, salaried employees, and business owners.
Market-Linked Growth
NPS investments are linked to market performance, allowing long-term wealth creation through equity and debt instruments.
Low-Cost Investment
NPS has one of the lowest fund management charges globally, ensuring higher returns over the long term.
Choice of Investment Options
Subscribers can choose:
- Active Choice: Select asset allocation manually
- Auto Choice: Age-based automatic allocation
Flexible Withdrawals
At maturity (60 years), investors can withdraw up to 60% of the corpus tax-free, while the remaining 40% is invested in an annuity.
Portable Across India
Your NPS account stays active even if you change jobs, states, or sectors.
Benefits of the National Pension Scheme (NPS)
In addition to providing full tax advantages on contributions and half-tax benefits on maturity, the NPS scheme benefits also provide a unique investment option not seen in other retirement savings vehicles.
The NPS trust determines the fees associated with running the system, and new subscribers must pay Rs 200 to join. The fees for creating an account are 40 rupees, maintaining it annually will set you back between 60 and 95 rupees, and a single transaction will set you back about 3.75 rupees.
In addition to the custodian’s asset servicing fee of 0.0032%, the Pension Fund Manager’s (PFM) management fee is 0.01% of the assets under management. Even while the POP adds fees to every transaction, they are among the world’s lowest of any financial product. The NPS is the best retirement plan for price and tax efficiency. It is governed by the PFRDA and includes advantages like portability, the freedom to choose across assets and fund managers, and it is affordable and tax-efficient to boot.
Tax Benefits of NPS
The National Pension System (NPS) offers significant tax benefits, making it an attractive retirement savings option. Here’s a breakdown of the tax advantages:
- Taxable (Withdrawal): Withdrawals from the NPS are subject to tax. However, the first 40% of the corpus withdrawn at the time of retirement is entirely tax-free, providing a substantial tax-saving benefit.
- Section 80C Deduction: You can claim a tax deduction of up to INR 1,50,000 per annum under Section 80C for your contributions to the NPS. This helps in reducing your taxable income substantially.
- Additional Deduction Under Section 80CCD(1B): Beyond the Section 80C limit, you can avail of an additional tax deduction of up to INR 50,000 under Section 80CCD(1B). This makes NPS one of the few investment options that offer a total tax deduction of up to INR 2,00,000 annually.
- EET Tax Status: The NPS follows the Exempt-Exempt-Taxable (EET) regime. This means:
- Exempt (Contribution): Your contributions to the NPS are exempt from tax.
- Exempt (Accumulation): The returns generated on these contributions are also exempt from tax.
Types of NPS Accounts
Account Tier 1:
- NPS members must have this particular account.
- Employees in the public sector are required to set aside 10% of their base pay plus DA in this NPS account. There is no disparity in government support.
- Those not employed by the government must put in a yearly minimum of INR 6000 and a minimum of INR 500 to register an account.
- Employees in the private sector may choose between a National Pension System and an Employee Provident Fund. A 10% base pay + DA contribution is required if you choose NPS. In the same proportion, the company will contribute. Remember that the employer contribution is not taxed as long as it is reported on Form 16 under Section 80 CCD2.
Account Tier 2:
- Subscribing to the NPS does not require users to open a Tier 2 account.
- NPS stands for “national pension system,” This model is available to all citizens and allows for withdrawals at any time.
- Neither the government nor the employer will make any payments into this account.
- Tier 2 NPS investments are not eligible for tax benefits.
- A Tier 2 account requires a minimum of INR 1000 to start, with a minimum contribution of INR 250.
- Tier 2 accounts must have a minimum balance of 2,000 (Indian Rupees) at the end of each calendar year.
- Tier 2 accounts have the same tax status as Mutual Funds.
Who Should Invest in NPS?
NPS is ideal for:
- Salaried individuals looking for long-term planning
- Self-employed professionals wanting retirement security
- Investors seeking tax benefits
- Anyone who prefers low-cost, government-backed schemes
How Are Your Funds Invested in NPS?
When you sign up for the NPS, you’ll need to deposit at least Rs 500 into your Tier I account and Rs 1,000 into your Tier II account. One must pay a minimum yearly contribution of Rs 1,000 under Tier I and Rs 250 under Tier II, while the amount and frequency of future contributions are flexible.
Your contributions to an NPS account may be invested in the market via one of three funds structured according to the kind of assets you choose to put money into. Alternative Investment Funds (A), Equity (E), Corporate Bonds (C), and Government Securities (G) are the four main types of investments available, each of which is further subdivided (See: Available asset classes).
The PFRDA monitors the NPS funds to ensure that participants have a level of safety and soundness, and 7 pension fund firms are in charge of administering the various plans. According to the investing criteria established by the regulator, these organizations actively manage four distinct asset classes.
Subscribers to the NPS can either actively select assets from among the different classes or passively receive allocations based on predetermined parameters. Within the framework of an active selection, the subscriber determines the allocation of funds across several asset classes.
Asset allocation is an automated choice governed by the subscriber’s age. Both choices have their merits; the one you choose should depend on your comfort level in handling the allocation. In light of the NPS’s indefinite duration, switching between the two options is possible. However, early notice is required, and one election per fiscal year is permitted.
Who can register for NPS?
1. Age
- Individuals aged 18 to 70 years can join the NPS. There is no upper age limit for exiting or withdrawing from the scheme.
2. Citizenship
- Indian Citizens: Both resident and non-resident Indians (NRIs) can register for the NPS.
- Overseas Citizens of India (OCI): OCI cardholders are also eligible to join the NPS.
3. Employment Status
- Salaried Employees: Individuals working in the private sector, public sector, or government organizations can enroll in the NPS.
- Self-Employed Individuals: Entrepreneurs, freelancers, and professionals can also participate in the NPS.
- Government Employees: Central and state government employees, except those in the armed forces, are mandatorily covered under the NPS, replacing the earlier pension schemes.
4. Corporate Employees
- Employees of corporations that have adopted the NPS can join through their employer’s scheme.
5. Unorganized Sector Workers
- Workers in the unorganized sector, who are not covered by other retirement schemes, can also join the NPS through the Swavalamban Scheme.
6. Spouses
- Spouses of eligible individuals can also open an NPS account in their name.
7. Other Eligibility
- KYC Compliance: Applicants must comply with the Know Your Customer (KYC) norms, which include providing proof of identity, address, and other necessary documents during registration.
How to Register
Register Online
Through the eNPS portal, where you can complete the registration process using Aadhaar or PAN.
Register Offline
By visiting a Point of Presence (POP) such as banks, post offices, or other authorized NPS service providers to fill out the registration form and submit necessary documents.
Conclusion
Retirement planning is difficult since it is difficult to predict how much money you will need to live well in retirement. The amount of this fund may be estimated with the help of several resources, most of which use either an income replacement or an expenditure replacement methodology. To calculate how much money you’ll need for retirement, you should multiply your expected years in retirement by your current yearly costs or income.
However, things may seem more complex than they may seem because of inflation, emergency bills, or a health condition whose prices exceed the coverage provided by your insurance. Choosing the National Pension System (NPS) as your primary retirement savings vehicle and supplementing it with other available instruments to create a retirement corpus that matches your financial goals is a viable option.
