Retirement is an important stage in everyone’s life. We all want to lead a comfortable life post-retirement, for which it is very important to have a sufficient amount in hand.
Sometimes choosing the right pension fund for retirement can be a challenging task. If you too are looking for such a fund, then NPS may be the end of your search.
This article is designed to cover all your doubts about the National Pension Scheme (NPS).
What is NPS?
The National Pension Scheme (also known as the National Pension System) is an investment cum pension plan in which you need to contribute on a regular basis to receive post-retirement benefits.
This scheme was first launched on 1st Jan 2004 by the central government for the government employees only. Further in 2009, it was opened for all the citizens of India. This means that any citizen of India can open their NPS account on a voluntary basis.
NPS Benefits
1. Transparent
NPS is a transparent scheme where you as a subscriber will be able to know about the investment value on a day-to-day basis.
2. Simple
The process of opening an NPS account is simple. You may either open your NPS account online through the eNPS website or you can visit the nearest Point of Presence (POP) / Bank to open it offline.
3. Portable
As an NPS Subscriber, you get a unique Permanent Retirement Account Number (PRAN). This number is similar to UAN in the case of EPF which means it will always remain with you (just like your PRAN) and your contribution will also be mapped under it.
4. Well-regulated
The Pension Fund Regulatory and Development Authority (PFRDA) regulate the NPS. They offer transparent investment norms as well as monitor and review the performance of fund managers on a regular basis.
Who can join NPS?
The age eligibility to open NPS account is between 18 to 60 years. This means that any person in the above age group can open NPS account and also contribute in it voluntarily (if they wish).
NPS can prove to be a good investment option for those who are planning for retirement and also don’t want to take a heavy risk like investment in the stock markets. Also, if you want to save tax as well then you can consider NPS as it offers various tax benefits to the subscribers.
Types of NPS Account
There are two types of NPS Account-
1. TIER-I Account
This is the main pension account with the lock-in period as 60 years of age. This means you can’t withdraw before your retirement period.
You can open Tier-I Account with a minimum balance of Rs 500.
2. TIER-II Account
This is the voluntary saving account and it is mandatory to have an active Tier-I Account in order to open it.
Tier-II Account does not have a lock-in period, i.e., you can withdraw your savings anytime. You will not get any tax exemption in this account, i.e., your savings are fully taxable here. The minimum balance to open Tier-II Account is Rs 1000.
Minimum Contributions to Tier-I and Tier-II Account
| TIER-I | TIER-II | |
| Minimum contribution at the time of account opening | Rs. 500 | Rs. 1000 |
| Minimum amount for subsequent contribution | Rs. 500 | Rs. 250 |
| Minimum contribution per year | Rs. 1000 | Nil. You can even choose not to make any contribution. |
| Minimum number of contributions per year | One | Nil |
Who manages your money in NPS?
The money deposited in NPS is invested by the Pension Fund Managers of PFRDA. There are 7 fund managers as appointed by the PFRDA-
1. ICICI Prudential Pension Fund
2. LIC Pension Fund Ltd
3. Kotak Mahindra Pension Fund
4. SBI Pension Fund Pvt Ltd.
5. UTI Retirement Solutions Pension Fund
6. HDFC Pension Management Company Ltd.
7. Aditya Birla Sun life Pension Management Ltd.
As an NPS Subscriber, you can choose among the 7, as to which fund manager will manage your money. You can even change your fund manager in the future.
Asset Allocation in NPS
The money in NPS is invested in four asset class as-
| Asset Class | Risks Involved |
| G- Government Bonds | Low |
| C- Corporate Bonds | Moderate |
| E- Equity | High |
| A- Alternative Investments (like REITs: Real Estate Investment Trusts, CMBS, MBS, AIFs, Invlts etc.) | Very High (up to 5%) |
Here, you have 2 options to choose-
1. Active Choice
2. Auto Choice
1. Active Choice
In Active Choice, you get the freedom to decide the percent allocation of your funds. This means you can decide how much of your money should go to which asset class. You can change the percent allocation twice a year.
Let us know about the limitations of active choice.
- The maximum equity allocation in the active choice is 75% till 50 years of your age. This means you can’t give 100% of your fund to the Equity Asset Class (E).
- After 50 years of age, the equity allocation gets reduced by 2.5% every year and in the end, remains at 50% when you become 60 years old.
| Age | Equity Exposure |
| Up to 50 Years | 75% |
| 51 Years | 72.5% |
| 52 Years | 70% |
| 53 Years | 67.5% |
| 54 Years | 65% |
| 55 Years | 62.5% |
| 56 Years | 60% |
| 57 Years | 57.5% |
| 58 Years | 55% |
| 59 Years | 52.5% |
| 60 Years & Above | 50% |
- You can allocate a maximum of 5% to the Alternative Investments like REITs: Real Estate Investment Trusts, CMBS, MBS, AIFs, Invlts, etc.
2. Auto Choice
This is the default option where you do not have to indulge in the hassle of asset management. Auto Choice is a great option for those who are unsure of how much to allocate to which asset class.
Here, you get three easy options as-
1. Aggressive Life Cycle Fund [For high-risk takers]
2. Moderate Life Cycle Fund [For moderate-risk takers]
3. Conservative Life Cycle Fund [For low-risk takers]
Let us discuss it one by one in detail.
1. Aggressive Life Cycle Fund
This can be a good option for subscribers with high-risk appetite. The maximum equity concentration is 75% if you are 35 Years or below and in the end, remains at 15% as you turn 55.
| Age | Asset Class E (%) | Asset Class C (%) | Asset Class G (%) |
| Up to 35 Years | 75 | 10 | 15 |
| 36 Years | 71 | 11 | 18 |
| 37 Years | 67 | 12 | 21 |
| 38 Years | 63 | 13 | 24 |
| 39 Years | 59 | 14 | 27 |
| 40 Years | 55 | 15 | 30 |
| 41 Years | 51 | 16 | 33 |
| 42 Years | 47 | 17 | 36 |
| 43 Years | 43 | 18 | 39 |
| 44 Years | 39 | 19 | 42 |
| 45 Years | 35 | 20 | 45 |
| 46 Years | 32 | 20 | 48 |
| 47 Years | 29 | 20 | 51 |
| 48 Years | 26 | 20 | 54 |
| 49 Years | 23 | 20 | 57 |
| 50 Years | 20 | 20 | 60 |
| 51 Years | 19 | 18 | 63 |
| 52 Years | 18 | 16 | 66 |
| 53 Years | 17 | 14 | 69 |
| 54 Years | 16 | 12 | 72 |
| 55 Years & Above | 15 | 10 | 75 |
2. Moderate Life Cycle Fund
This is a good option for moderate-risk takers. The maximum equity exposure is 50% till 35 Years of Age. It further reduces by 2% every year and in the end, settles at 10% as you reach 55.
| Age | Asset Class E (%) | Asset Class C (%) | Asset Class G (%) |
| Up to 35 Years | 50 | 30 | 20 |
| 36 Years | 48 | 29 | 23 |
| 37 Years | 46 | 28 | 26 |
| 38 Years | 44 | 27 | 29 |
| 39 Years | 42 | 26 | 32 |
| 40 Years | 40 | 25 | 35 |
| 41 Years | 38 | 24 | 38 |
| 42 Years | 36 | 23 | 41 |
| 43 Years | 34 | 22 | 44 |
| 44 Years | 32 | 21 | 47 |
| 45 Years | 30 | 20 | 50 |
| 46 Years | 28 | 19 | 53 |
| 47 Years | 26 | 18 | 56 |
| 48 Years | 24 | 17 | 59 |
| 49 Years | 22 | 16 | 62 |
| 50 Years | 20 | 15 | 65 |
| 51 Years | 18 | 14 | 68 |
| 52 Years | 16 | 13 | 71 |
| 53 Years | 14 | 12 | 74 |
| 54 Years | 12 | 11 | 77 |
| 55 Years & Above | 10 | 10 | 80 |
3) Conservative Life Cycle Fund
This is best-suited for low-risk subscribers. This option offers maximum equity allocation of 25% if you are 35 or below. The equity exposure reduces by 1% every year after the 35 years of age and in the end, settles at 5% as you turn 55.
| Age | Asset Class E (%) | Asset Class C (%) | Asset Class G (%) |
| Up to 35 Years | 25 | 45 | 30 |
| 36 Years | 24 | 43 | 33 |
| 37 Years | 23 | 41 | 36 |
| 38 Years | 22 | 39 | 39 |
| 39 Years | 21 | 37 | 42 |
| 40 Years | 20 | 35 | 45 |
| 41 Years | 19 | 33 | 48 |
| 42 Years | 18 | 31 | 51 |
| 43 Years | 17 | 29 | 54 |
| 44 Years | 16 | 27 | 57 |
| 45 Years | 15 | 25 | 60 |
| 46 Years | 14 | 23 | 63 |
| 47 Years | 13 | 21 | 66 |
| 48 Years | 12 | 19 | 69 |
| 49 Years | 11 | 17 | 72 |
| 50 Years | 10 | 15 | 75 |
| 51 Years | 9 | 13 | 78 |
| 52 Years | 8 | 11 | 81 |
| 53 Years | 7 | 9 | 84 |
| 54 Years | 6 | 7 | 87 |
| 55 Years & Above | 5 | 5 | 90 |
Withdrawal Rules in NPS
- As NPS is a retirement scheme, the subscribers are allowed to withdraw only after the lock-in-period, i.e., after 60 Years of Age.
- You can withdraw only a maximum of 60% of your investment amount after 60 Years of Age. For the rest 40% corpus, the subscribers mandatorily have to buy an annuity from the Annuity Service Providers (ASPs). They will provide you with a regular pension on that amount.
- Subscribers can withdraw their entire amount if it is 2 lakhs or less.
- Premature Withdrawal- If any subscriber wants to withdraw before the maturity period, he/she have to fulfil some conditions:
- This is available only after three years of regular contribution, i.e., your account should be active for at least three years.
- You are permitted to withdraw up to a maximum of 25% of your own contribution.
What does this mean?
Many a times both the employee as well as the employer contributes to the NPS Account. Then, in such case, you as an employee can’t withdraw the employer’s contribution. You are eligible to withdraw only the 25% of your own contribution.
- The subscribers can partially withdraw up to a maximum of only three times during the entire tenure and that too in case of special situations such as serious illness, children’s education/wedding, buying a house, business, skill development, etc.
- Premature Exit- This means you want to take pre-retirement, i.e., you want to retire before 60 and opt to get a regular pension from your investments. You need to follow some conditions for this-
- The account should be at least 10 years old. This means you need to be an active contributor for at least 10 years.
- You can withdraw a maximum of 20% of your entire corpus as a lump sum and have to buy an annuity for at least 80% of the remaining amount.
- Subscribers can withdraw their entire corpus (100%) as a lump sum if it is not more than 1 lakh.
- The NPS Account in case of Premature Exit is closed as you have taken voluntary retirement. This does not happen in the case of Premature Withdrawal.
Tax Benefits in NPS
NPS is well-known for the tax benefits that it offers to the subscribers. But, most of us fail to understand this tax system and are hence unable to claim and efficiently save tax. I am trying my best to explain this tricky section in an easy way.
1. Section 80CCD (1)
Under this section, an employee (Both Government or Private) can claim a tax deduction up to the contribution of 10% of Annual Salary (Basic + DA) with the maximum limit as Rs. 1.5 Lakhs. This section is considered as a part of 80C, i.e., you need to claim U/S [80C + 80CCD (1)] together to avail this tax benefit.
If you are an individual or self-employed, you can claim the tax deduction up to 20% of Annual Income U/S 80 CCD (1).
2. Section 80CCD (1B)
You can claim an additional tax deduction up to Rs. 50,000 U/S 80CCD (1B) over and above Section 80C limit or what you claim under section 80CCD (1).
3. Section 80CCD (2)
You can claim the tax deduction of your employer’s contribution to your NPS Account as well U/S 80CCD (2).
The employer’s contribution is eligible for tax deduction up to 10% of your Annual Salary [Basic + DA]. This is 14% in case of Central Government Employee.
This deduction is exclusive of the Section 80C limit of Rs. 1.5 Lakhs. You can’t avail of this tax benefit if you are self-employed.
This was all about the National Pension Scheme or NPS. I hope you have enjoyed it.
If you have any query regarding NPS, you can hit the comment section below. I will be more than happy to help you.
Happy Investing !!
YOU ARE BEST. NO ONE CAN MATCH YOU!