National Pension Scheme (NPS) : Your Complete Guide to Retirement Planning

Introduction

The National Pension Scheme (NPS) is a government-sponsored pension initiative aimed at providing retirement benefits to Indian citizens. It’s a flexible, portable, and cost-effective way to ensure financial security post-retirement. In this guide, we will take you through a step-by-step approach to understanding, investing, and managing your NPS account.

What is the National Pension Scheme (NPS)?

NPS is a long-term, voluntary retirement savings scheme for individuals. Launched by the Indian government in 2004, it aims to provide subscribers with a regular income after retirement. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Eligibility Criteria

• Who can join NPS? Any Indian citizen, whether resident or non-resident, aged between 18 and 65 years can join NPS.

• Age limits and conditions: Individuals can join the scheme at any time before reaching the age of 65.

• Citizenship and residency requirements: Both residents and non-residents can join, but they must comply with KYC norms.

Objective of NPS

The primary objective of the National Pension Scheme (NPS) is to provide retirement income to all Indian citizens. The scheme is designed to achieve the following goals:

Promote Savings for Retirement: 

NPS encourages individuals to develop a habit of saving for their retirement over their working life, ensuring they have a steady income post-retirement.

Provide Sustainable Pension: 

By offering a long-term savings mechanism, NPS aims to provide subscribers with a sustainable and regular income during their retirement years.

Inclusivity: 

The scheme is inclusive and open to all Indian citizens, including those in the unorganized sector, self-employed, and non-resident Indians (NRIs), ensuring that everyone has the opportunity to secure their financial future.

Flexibility: 

NPS offers flexibility in terms of contribution amounts and investment choices, allowing subscribers to tailor their retirement savings plan according to their financial goals and risk appetite.

Cost-Effectiveness: 

With one of the lowest fund management charges, NPS ensures that a significant portion of the contributions is invested, maximizing the growth potential of the retirement corpus.

Transparency: 

The scheme is structured to be transparent, with regular updates on fund performance and clear guidelines on contributions, withdrawals, and fund management.

Professional Fund Management:

NPS funds are managed by professional fund managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring that the investments are handled efficiently and effectively.

Tax Benefits: 

To encourage participation, NPS provides tax benefits to both the contributors and employers, making it a financially attractive option for retirement planning.

Tax deductions:

• Section 80CCD(1): Employee contributions up to 10% of salary (Basic + DA) are deductible (within the overall ceiling of ₹1.5 lakh under Section 80C).

• Section 80CCD(1B): Additional deduction of ₹50,000 for contributions to NPS.

• Section 80CCD(2): Employer contributions up to 10% of salary are deductible and do not form part of the ₹1.5 lakh limit under Section 80C.

 

Types of Accounts

NPS offers two types of accounts:

Feature	Tier I Account (Retirement Account)	Tier II Account (Voluntary Savings Account)
Purpose	Primarily for retirement savings	Voluntary savings with no withdrawal restrictions
Withdrawal	Restricted until retirement	Flexible withdrawals at any time
Minimum contribution (at account opening)	₹500	₹1,000
Minimum contribution (per annum)	₹1,000	No minimum
Tax Benefits	Available	No tax benefits

How NPS Works

Contribution structure: 

Subscribers contribute regularly to their NPS account during their working life.

Investment options:

• Active Choice: You can allocate your contributions across equity (E), corporate bonds (C), and government securities (G). Maximum equity allocation is capped at 75%.

• Auto Choice: If you don’t wish to actively manage your portfolio, the funds will automatically be allocated based on your age, with higher exposure to government securities as you near retirement.

Fund managers and their roles:

Professional fund managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA) manage the contributions.

Tax Treatment of NPS

The National Pension Scheme (NPS) offers tax benefits under different sections of the Income Tax Act, but it is not fully exempt-exempt-exempt (EEE). Here’s a detailed breakdown of the tax treatment at various stages:

Contributions (Exempt):

Employee Contributions:

• Contributions made by employees are eligible for tax deductions under Section 80CCD(1) up to 10% of their salary (Basic + DA), subject to the overall ceiling of ₹1.5 lakh under Section 80C.

• An additional deduction of up to ₹50,000 is available under Section 80CCD(1B), which is over and above the limit of ₹1.5 lakh under Section 80C.

Employer Contributions:

• Employer contributions are deductible under Section 80CCD(2) up to 10% of the employee’s salary (Basic + DA). This contribution is not part of the ₹1.5 lakh limit under Section 80C and is an additional tax benefit.

Accumulation (Exempt):

• The growth or accumulation in the NPS account is not taxed annually. The returns generated from the investments are exempt from tax, allowing the corpus to grow without any tax implications during the accumulation phase.

Withdrawal (Partially Exempt):

At Retirement (60 years):

• Up to 60% of the corpus can be withdrawn as a lump sum. Out of this, 40% of the total corpus is tax-exempt.

• The remaining 20% of the corpus withdrawn as a lump sum is taxable as per the subscriber’s applicable tax slab.

• The mandatory 40% of the corpus used to purchase an annuity is exempt from tax at the time of purchase, but the annuity income received thereafter is taxable as per the subscriber’s applicable tax slab.

Before Retirement:

• If a subscriber exits NPS before the age of 60, up to 20% of the corpus can be withdrawn as a lump sum, which is taxable.

• The remaining 80% must be used to purchase an annuity, which is exempt from tax at the time of purchase, but the annuity income received is taxable.

Stage	Tax Treatment
Contributions	Exempt (subject to limits under Section 80C, 80CCD(1B), and 80CCD(2))
Accumulation	Exempt
Withdrawal	Partially Exempt (60% at retirement, with 40% tax-exempt)
Annuity Income	Taxable

Advantages and Disadvantages of NPS

Advantages:

• Low cost: NPS has one of the lowest fund management charges.

• Flexibility in investment choices: Subscribers can choose their asset allocation.

• Professional management of funds: Managed by experienced fund managers.

• Portability: Account remains the same across jobs and locations.

Disadvantages

• Restrictions on withdrawals: Limited withdrawal options before retirement.

• Mandatory annuity purchase: 40% of the corpus must be used to buy an annuity.

• Market-linked returns: Subject to market risks.

How to Open an NPS Account

Opening an NPS account is simple and can be done either online or offline.

Offline (Through Point of Presence - PoP):

• Visit the nearest authorized PoP.

• Fill out the NPS application form and submit KYC documents (Aadhaar, PAN, etc.).

• Make an initial contribution (minimum ₹500 for Tier 1 and ₹1000 for Tier 2).

• Get the Permanent Retirement Account Number (PRAN).

Online (Through eNPS Portal):

• Visit the eNPS website.

• Register using your Aadhaar/PAN.

• Complete KYC and make your first contribution online.

• PRAN will be generated and sent to your registered address.

Comparison with Other Retirement Schemes

NPS offers market-linked returns, and the historical performance has been competitive with other retirement schemes. However, returns can vary based on the chosen investment option and market conditions.

Feature	NPS	EPF	PPF
Eligibility	All Indian citizens (18-65)	Salaried employees in specific sectors	All Indian citizens
Returns	Market-linked, potentially higher	Fixed returns, currently ~8.5%	Fixed returns, currently ~7.1%
Risk	Market risks	Low risk	Low risk
Tax Benefits	Available	Available	Available
Withdrawal Flexibility	Restricted	Restricted	Partial withdrawals allowed
Employer Contribution	Optional	Mandatory	Not applicable

NPS Calculator Tool

To help you plan your retirement savings more effectively, I have developed a comprehensive NPS Calculator. This tool allows you to:

• Estimate Your Corpus: Enter your age, monthly contribution, expected rate of return, and retirement age to estimate the corpus you will accumulate.

• Visualize Growth: See how your contributions grow over time with the power of compounding.

• Plan Contributions: Adjust your contribution amount to see the impact on your final corpus.

Conclusion

The National Pension Scheme (NPS) is an excellent tool for planning your retirement. With its tax advantages, flexibility, and low-cost structure, NPS is a strong contender for those looking to secure their financial future. By starting early, you can accumulate a substantial corpus and enjoy a stress-free retirement.

FAQs

What is the minimum contribution for NPS? 

The minimum contribution is ₹500 for Tier I and ₹1,000 for Tier II accounts.

Can NRI join NPS? 

Yes, Non-Resident Indians (NRIs) can join NPS.

What happens if I discontinue contributions? 

The account will be frozen, but it can be reactivated by paying a penalty and making the minimum contribution.

Who Should Invest in NPS?

• Young Professionals: To take advantage of higher equity allocation for long-term wealth creation.

• Salaried Employees: To benefit from employer contributions under Section 80CCD(2).

• Self-Employed Individuals: NPS provides a pension solution along with tax benefits.

What are the annuity options  available under NPS ?

Once you reach retirement, you are required to use 40% of your corpus to purchase an annuity. Some common annuity options are:

• Life Annuity: Regular pension payments till the annuitant's death.

• Annuity with Return of Purchase Price: Regular pension with a return of the annuity purchase amount to the nominee after death.

• Joint Life Annuity: Pension payments continue to your spouse after your death.