National Pension System: Exciting Benefits, Eligibility, Returns, and the New Partial Withdrawal Rule!

National Pension System: Exciting Benefits, Eligibility, Returns, and the New Partial Withdrawal Rule!
National Pension System

National Pension System (NPS) is an easily accessible versatile retirement savings option in India. It is available for a wide range of individuals, irrespective of their employment status or sector, making it a robust scheme for investment and tax saving.

NPS follows a defined contribution model, where subscribers contribute to their pension accounts. Unlike defined benefit schemes, there is no fixed payout upon exiting the system. Instead, the accumulated wealth in NPS depends on the contributions made and the investment income generated over time.

The good news is that if you start investing wisely now, it will be easy to reach your savings goal. The National Pension System (NPS) is a great way to save for retirement for Indians irrespective of their age, service, business, residing city or state.

The Indian government has recently tweaked some guidelines for partial withdrawal of retirement funds with effect from February 1, 2024.

Let's explore NPS further, including its eligibility criteria, potential returns, key features, and advantages. Let's delve into its operational mechanisms, withdrawal regulations, and investment opportunities. 

What is NPS?
When Was NPS Introduced?
Aims and Objectives
How Does NPS Work?
Eligibility Criteria
What Are the Different Types of NPS Accounts?
Who Can Join NPS?
Who Regulates NPS?
How to Open an NPS Account?
Returns
Where Does NPS Invest Your Funds?
How Are Funds Invested in NPS?
New Partial Withdrawal Clause

Pre-mature Exit
In the Case of Retirement
Income Tax Benefits

What is NPS?

The National Pension System (NPS) is a social security program introduced by the Government of India. It is available to employees across different sectors, including public, private, and unorganized, except those serving in the armed forces.

When Was NPS Introduced?

The government abolished the old pension scheme and launched NPS on January 1, 2004. It was earlier only for new Central government employees and it was compulsory for them. 

Later in May 2009, the government introduced NPS for all Indian citizens.

At present, all government employees, Central and State, have to mandatorily invest in NPS. The NPS enables individuals to make regular investments in a pension scheme throughout their employment. However, it is optional for private sector employees and individuals like Non-Resident Indians (NRIs) and Overseas Citizenship of India (OCIs).

Aims and Objectives

  1. The NPS scheme is aimed at providing retirement benefits to all Indian citizens.
  2. The scheme promotes disciplined savings during one's career.
  3. It encourages people to save for their post-retirement life.
  4. It helps people meet their expenses and navigate through retirement with ease.
  5. The scheme encourages individuals to save for the future.

How Does NPS Work?

  1. You can open an NPS account as an individual or through your employer/company.
  2. You can contribute to your account every year till you attain the age of 60.
  3. Your employer can also contribute a certain amount periodically.
  4. After attaining 60 years of age, you can withdraw 60% of the accumulated amount.
  5. The rest of the 40% amount should be invested in the pension fund.
  6. The pension fund will ensure a steady monthly pension income.
  7. In case of the death of the subscriber, the entire accumulated pension wealth shall be paid to the nominees or legal heirs of the subscribers, on a case-to-case basis.

Eligibility Criteria

  1. Indian citizens, including residents, non-residents, and overseas citizens of India, are eligible to open an NPS account.
  2. NPS subscriber needs to be between the age of 18 and 70 years as of the date of submission of his/her application to the Point of Presence (POP)/POP-SP.
  3. Your corporation/organization has adopted the NPS scheme.
  4. Must adhere to Know Your Customer (KYC) norms.
  5. NPS is an individual account, it cannot be opened for others or third parties.
  6. NRIs and Overseas Citizenship of India (OCIs) can open an NPS account. NRIs and OCIs are allowed to open Tier I accounts under NPS both on a repatriable and non-repatriable basis.

Here's what this means:

Repatriable Basis: NRIs and OCIs can open Tier 1 NPS accounts on a repatriable basis, wherein they can remit funds from their Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts to make contributions to their NPS accounts. The funds invested through this mode are considered repatriable, meaning they can be taken back or transferred abroad along with the accrued benefits.

Non-Repatriable Basis: Alternatively, NRIs and OCIs can also open Tier 1 NPS accounts on a non-repatriable basis. In this case, the contributions are made using funds that cannot be repatriated, such as those held in their Non-Resident Ordinary (NRO) accounts.

By allowing NRIs and OCIs to invest in NPS, India's retirement savings scheme becomes accessible to a broader segment of the population, including those living abroad but wanting to save for their retirement in India. This expansion aligns with the government's efforts to promote long-term savings and financial security among NRIs and OCIs.


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What Are the Different Types of NPS Accounts?

NPS presents two types of accounts: Tier 1 and Tier 2.

Tier 1 serves as a retirement account with tax advantages and limited withdrawal options, catering to long-term savings needs. On the other hand, Tier 2 offers greater flexibility, allowing easier access to funds and addressing various short-term financial objectives.

Who Can Join NPS?

NPS is designed to be inclusive and accessible to a wide range of individuals, irrespective of their employment status, sector, or residency status, making it a versatile retirement savings option in India.

Who Regulates NPS?

The National Pension System is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA is a statutory regulatory body established by the Government of India in 2003 through the PFRDA Act of 2013.

PFRDA plays a critical role in creating a robust and trustworthy pension system, with a focus on protecting the interests of pension subscribers and promoting the long-term growth and sustainability of the sector.

Subscribers Under the National Pension System in India From Financial Year 2014 to 2023
Subscribers Under the National Pension System in India From Financial Year 2014 to 2023

How to Open an NPS Account?

Choose a Pension Fund Manager (PFM)

Before opening an NPS account, you need to select a Pension Fund Manager from those available. The PFM will manage your investments under the NPS scheme. You can choose from various PFMs registered with the Pension Fund Regulatory and Development Authority.

Currently, there are 10 Pension Fund Managers who manage investments by NPS subscribers:

  1. Aditya Birla Sun Life Pension Management
  2. Axis Pension Fund Management
  3. HDFC Pension Management
  4. ICICI Prudential Pension Fund Management
  5. Kotak Mahindra Pension Fund
  6. LIC Pension Fund
  7. Max Life Pension Fund Management
  8. SBI Pension Funds
  9. Tata Pension Management
  10. UTI Retirement Solutions

NPS participants have the option to choose up to three pension fund managers, each specializing in different asset classes. Investors can allocate their funds across various asset classes, including equity (E), government bonds (G), corporate bonds (C), and alternative asset classes (A).

For example: A subscriber can choose the SBI Pension Fund Manager for equities, the Kotak Pension Fund Manager for government securities, HDFC Pension Fund Manager for corporate bonds.

You can exercise flexibility within NPS by adjusting your fund manager once per year and altering your investment scheme up to four times annually.

Select the NPS Service Provider

After choosing a PFM, one needs to select an NPS Service Provider (NSP) through which he/she wants to open an NPS account. NSPs are entities authorized by the PFRDA to facilitate NPS account opening and related services. Banks, financial institutions, and other entities can act as NSPs.

Fill out the NPS Registration Form

One can obtain the NPS registration form from the selected NSP, either online or through their physical branches. Fill out the form with accurate personal and nominee details, as well as investment preferences.

Provide KYC Documents

One needs to submit Know Your Customer (KYC) documents along with the registration form. Typically, documents such as an Aadhaar card, PAN card, passport, proof of address, and a passport-size photograph are required for KYC verification.

Choose Account Type

Decide whether one wants to open a Tier-1 or Tier-2 NPS account. Tier-1 accounts are mandatory for NPS subscribers and have restrictions on withdrawals, while Tier-II accounts are optional and offer more flexibility.

Contribute Funds

Make an initial contribution towards your NPS account. The minimum contribution amount varies depending on the NSP and the mode of contribution (online or offline). Subscribers can open an NPS account online by visiting the eNPS website through PAN & Bank account details.

eNPS Website
eNPS Website

Receive PRAN

Upon successful registration, a Permanent Retirement Account Number (PRAN) by the Central Recordkeeping Agency (CRA) will be allocated. PRAN is a unique 12-digit identification number assigned to each NPS subscriber.

Choose Investment Option

Select your preferred investment option and asset allocation pattern among the available choices provided by the chosen PFM. NPS offers various investment options, including equity, corporate bonds, government securities, and alternative investment funds.

Regular Contributions

Once the NPS account is active, one can make regular contributions towards retirement savings. One can set up automatic contributions through his/her bank account or make manual contributions as per convenience.

By following these steps, one can successfully open an NPS account in India and start building his/her retirement corpus through the National Pension System.

It's advisable to thoroughly understand the terms and conditions, as well as the investment options available, before opening an NPS account.

Returns

The returns on NPS investments are dependent on the performance of the assets in which the funds are invested. This makes NPS a market-linked product. One cannot predict the amount of return one will receive upon retirement in advance. However, NPS has so far yielded 9-12% annualized returns, higher than other tax-saving investment schemes like the Public Provident Fund (PPF)

Where Does NPS Invest Your Funds?

NPS is a market-linked product that allows one to invest in a variety of assets, such as stock (equity), government debt (bonds), corporate debt, and alternative assets like real estate investment trusts (REITs) or infrastructure investment trusts (InvITs). 

With NPS, one also has the flexibility to determine the allocation of investments across different asset classes.

Vikash Kumar Sharma, a telecom engineer at Nokia, shared his investment strategy. At 30 years old, he has been investing for 5 years. He expects his savings to reach Rs 2 crore by the time he turns 60. "Out of this, Rs 1.23 crore will be available immediately, while the remaining Rs 82 lakhs will be invested in the market to provide a monthly pension." He anticipates a 10% return, considering this investment option lucrative, tax-friendly, and secure.

Everything You Want to Know About NPS | National Pension System | India's Retirement Pension Scheme

How Are Funds Invested in NPS?

In the NPS system, investments are spread across asset classes identified as ECG - Equity (E), Corporate Debt (C), Government Securities (G), and Alternative Investment Funds (A). These classes present diverse risk-return profiles and provide exposure to various market instruments.

NPS provides two investment avenues, Auto and Active choice. Under the Active choice, one has the autonomy to determine the distribution of assets in their portfolio, which means, one has a say in their asset mix. 
In the Auto choice, funds are allocated in assets automatically based on your age and risk profile, with both options capping equity allocation at 75%.

Within the Auto Choice feature of NPS, there are three options available:

  • Aggressive: With a maximum equity exposure of 75% until the age of 35
  • Moderate: Providing a maximum equity exposure of 50% until the age of 35
  • Conservative: Offering a maximum equity exposure of 25% until the age of 35

New Partial Withdrawal Clause

Can one withdraw funds from NPS for early retirement?
Yes, one can. If one wants to take some money out of their NPS savings before the age of 60 or when they retire, one can do so without closing their NPS account.

However, NPS subscribers are allowed to make partial withdrawals, subject to certain terms and conditions.

Who Is Eligible for Partial Withdrawal of NPS

  • One must have been in the NPS for at least three years.
  • One can't withdraw more than 25% of the money one has put into their NPS account, without counting what the employer added, when one applies for withdrawal. One can't take out any profits earned.
    For example: If someone has put in Rs 5 lakh and wants to withdraw, he/she can take out Rs 1.25 lakh only.
  • One can only withdraw money three times while they are in the NPS. If one wants to withdraw more later, one can only take out what they have added since their last withdrawal.

What Are the Predefined Conditions Where Partial Withdrawals Are Allowed?

When the subscriber fills out the withdrawal form, he/she can take out some of the money put into the pension account, but not more than 25% of what he/she has contributed, excluding any contributions from the employer, as per the PFRDA circular released on January 12, 2024.

The subscriber can only use this money for specific reasons:

  • Paying for children's higher education, including adopted children.
  • Covering the costs of children's weddings, including adopted children.
  • Buying or building a house or apartment in the subscriber’s name or jointly with the spouse. But if the subscriber already owns a house or apartment (not inherited), he/she can't withdraw money for this reason.
  • Paying for treatment of certain serious illnesses, like cancer, kidney failure, (end-stage renal failure), primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, heart valve surgery, stroke, myocardial infarction, coma, total blindness, paralysis, accidents of serious/life-threatening nature or Covid-19.
  • Covering medical expenses and other costs related to any disability or incapacity the subscriber has.
  • Paying for training or improving the subscriber’s skills.
  • Covering expenses incurred by the subscriber for starting an own business or a venture.

Documentation Needed for Withdrawal

The subscriber is required to have these documents to withdraw money from NPS:

  1. Filled withdrawal application form
  2. PRAN Card in original
  3. Proof of Identity (Attested copies)
  4. Proof of Address (Attested copies)
  5. A cancelled cheque
  6. However, if the subscriber is suffering from any illness as specified above, the withdrawal request can be submitted by any of his/her family members.

Pre-mature Exit

Premature exit is allowed if the subscriber wants to retire early or if he/she does not want to continue NPS before the age of 60 years. However, this exit is only possible if the subscriber has completed 10 years from the date of joining NPS.

At exit, the subscriber should invest at least 80% of the accumulated amount to purchase a pension fund. This will provide a monthly pension. The rest of the 20% of the accumulated wealth can be taken as a lump sum amount.

Note: If the accumulated amount is less than Rs 2.5 lakh, then the subscriber can withdraw the entire amount as a lump sum. In this case, there is no need to go for a pension fund.

In the Case of Retirement

Upon retirement, the regulations governing NPS withdrawals are outlined as follows:

The retirement age for NPS is 60 years. One’s contribution to NPS stops when he/she turns 60. At least 40% of the accumulated wealth should be invested in purchasing a pension fund. To receive a monthly pension post-retirement, this is mandatory.

One can withdraw 60% of the accumulated wealth as a lump sum amount from NPS. However, if the accumulated fund is less than or equal to Rs 5 lakh, then he/she can withdraw the entire amount in one go. One doesn’t need to purchase any pension fund.

Few other options:

  1. If one wants, he/she can purchase the pension fund up to 100% of the accumulated fund.
  2. If one wants, he/she can delay the withdrawal of the eligible lump sum amount and keep the fund invested till the age of 75 years.

If any wants, one can delay:

  1. Only the lump sum withdrawal
  2. Only the pension
  3. Both lump sum withdrawal and pension

If any subscriber wants, he/she can opt for withdrawal of a lump sum amount in phases (up to 10 installments). However one should purchase a pension fund before the phased withdrawal.    

Income Tax Benefits

Income tax benefits on the National Payment System are available under the following sections:

Tax Benefits to Employees on Self-Contribution

Employees contributing to NPS are eligible for the following tax benefits on their contribution:

  • Tax deduction up to 10% of salary (Basic + DA) under Section 80 CCD(1) within the overall ceiling of Rs 1.50 lakh under Section 80 CCE.
  • Tax deduction up to Rs 50,000 under Section 80 CCD(1B) over and above the overall ceiling of Rs 1.50 lakh under Section 80 CCE.

Tax Benefits to Employees on Employer’s Contribution

Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by the employer under Section 80 CCD(2) over the limit of Rs 1.50 lakh provided under Section 80 CCE.

Tax Benefits to Self-Employed

Individuals who are self-employed and contributing to NPS are eligible for the following tax benefits on their contribution:

  • Tax deduction of up to 20% of gross income under Section 80 CCD (1) within the overall ceiling of Rs 1.50 lakh under Section 80 CCE.
  • Tax deduction up to Rs 50,000 under Section 80 CCD(1B) over and above the overall ceiling of Rs 1.50 lakh under Section 80 CCE.

NPS offers individuals the opportunity to invest in a diversified portfolio of assets and potentially generate competitive returns over the long term, though with some degree of risk associated with market fluctuations. 

It is essential for subscribers to understand the market dynamics and their risk tolerance when investing in the National Pension System. One can select their preferred investment option or go for the auto choice.

Key Points to Remember

  • Start investing in NPS now to build a larger retirement corpus, ensuring a bigger pension when you reach 60 and begin receiving monthly payments for life.
  • Secure your old age and ensure ongoing financial stability for your family with NPS, offering a pension plan that continues payments to your spouse for life after your passing.
  • After turning 35, investments gradually transition from stocks to safer options yearly, shielding retirement savings from market fluctuations as retirement age approaches.
  • You have the flexibility to determine your annual investment amount, allowing you to start modestly and gradually increase your contributions as your confidence grows. Simply invest a minimum of Rs 1,000 per year to begin.
  • NPS allows tax deductions beyond Section 80C, with investments of up to Rs 50,000, enabling an extra annual saving of up to Rs 15,600.
  • Benefit from tax-free returns with NPS—savings on investment, returns, and final maturity amount—providing a rare triple tax advantage exclusive to select investment products.

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