National Pension Scheme (NPS) is a voluntary and long-term investment cum pension plan launched by the Government of India. This scheme is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA). This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces.
NPS provides impressive long-term savings options so that an individual can plan his/her retirement time efficiently by investing in this market-based plan.
Eligibility to invest
- Any citizen of India (resident or non-resident)
- Individual aged between 18-70 years as on the date of submission of application
- Individuals or as employee-employer groups corporates subject to submission of all required information and know your customer (KYC) documentation.
At present, the pension funds in NPS are managed by following seven Pension Fund Managers in the country:
- LIC Pension Fund.
- Aditya Birla Sun Life Pension Management Limited.
- HDFC Pension Management Company Limited.
- UTI Retirement Solutions Limited.
- SBI Pension Funds Private Limited.
- ICICI Prudential Pension Funds Management Company Limited.
- Kotak Mahindra Pension Fund Limited.
LIC Pension Fund, SBI Pension Fund, and UTI Retirement Solutions are the only fund managers who manage pension contributions of government employees under NPS.
Tier Options
Under the NPS account, two sub-accounts – Tiers I & II are provided.
Tier I
This is the basic tier in NPS. The investment amount is locked till 60 years of age. At the age of 60, 60% of the accumulated amount can be withdrawn, and the remaining amount will be paid out as a monthly pension. Only Tier I is eligible for tax exemption.
This is a non-withdrawable retirement account that can be withdrawn only upon meeting the exit conditions prescribed under NPS.
Tier II
This is a more flexible tier of NPS, it’s a voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish. This carries no tax benefit.
An investor needs to have a Tier I investment before they can invest in Tier II.
Investors of NPS need to choose one of the above tiers to make their contribution.
| Tier I | Tier II | |
| Eligibility | Indian citizen between age 18 & 70 years | Members of tier I only |
| Lock-in | Till age 60 years | Nil |
| Min. no. of contributions per year | 1 Per Year | Nil. Contribution is optional.. |
| Min contribution for account opening | ₹ 500 | ₹ 1000 |
| Min. amount for subsequent contributions | ₹ 500 | ₹ 500 |
| Min. no. of annual contribution | 1 Per year | Not applicable |
| Tax benefit on contribution. | Up to ₹ 1.5 lakhs under sec 80C and Up to ₹ 50K under sec 80CCD (1B) | No Tax benefit. |
| Taxation on withdrawal | At maturity the corpus is tax exempt | The corpus withdrawn is added to income and taxed as per one’s tax slab. |
Investment in NPS is independent of your contribution to any Provident Fund or any other pension fund.
Investment Options in NPS
a) Active choice of investing
Here the individual would decide on the asset classes in which the contributed funds are to be invested and their percentages. NPS offers 4 funds to subscribers:
- Equity (E): Scheme invests predominantly in Equity market instruments.
- Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments
- Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments
- Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc.
NPS restricts investment towards Equities Funds to 75% of contribution amount for both Tiers I and Tier II NPS Accounts. However, subscribers can invest up to 100% in Corporate Bonds or Government Bank Fund.
Further, Investment in Alternate Funds is restricted to 5% of the contribution amount. The alternate Funds option is there for Tier I NPS account only.
b) Auto choice of investing
This is the default option under NPS and wherein the management of investment of funds is done automatically based on the age profile of the subscriber. There are 3 Life Cycle Funds – LC 75, LC 50, and LC 25.These are also known as Aggressive, Moderate, and Conservative Life Cycle Funds respectively.
- Aggressive – LC75 In this choice, maximum 75% is given to E (equity) in the beginning and slowly moves to C and G near retirement age.
- Moderate – LC50 In this choice, maximum 50% is given to E (equity) in the beginning and slowly moves to C and G near retirement age.
- Conservative – LC25 In this choice, maximum 25% is given to E (equity) in the beginning and slowly moves to C and G near retirement age.
Pay-out and exit options in NPS
The primary objective of the Tier – I NPS Account is to create a Corpus which can be used at the time of retirement to buy a pension for the Subscriber / Nominee. Hence, there is a restriction imposed on lump sum amount accessible to Subscriber on exit as mentioned below:
| Exit before the age of 60 | Exit at retirement age |
| 1. Up to 20% of corpus can be withdrawn in lump sum 2. Balance amount needs to be invested in annuity. 3. If the corpus is less than or equal to ₹ 2.5 Lakhs, there is no need to invest in annuity. Entire amount can be withdrawn lump sum. | 1. Up to 60% of corpus can be withdrawn in lump sum 2. Balance amount needs to be invested in Annuity. 3. If the corpus is less than or equal to ₹ 5 lakhs, there is no need to invest into equity. Entire amount can be withdrawn in lump sum. |
Invest in NPS this financial year? Start here.
In case of exit from NPS on retirement age, the Subscriber can defer the withdrawal option till 10 years depending on the market condition. Subscriber can withdraw this amount either in a lump sum or take the same in 10 instalments before attaining the age of 75 years.
However, in the case of premature exit from NPS (before attaining the age of 60 years), the Subscriber does not have the option to defer the option.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute professional advice. While full efforts have been made to ensure the accuracy of data and numbers, no responsibility is taken for any errors or omissions. Tax implications on insurance, investments and returns from related products may change due to updates in tax laws. Always consult with your financial advisor or insurance expert before making any investment or insurance decisions. The author is not responsible for any financial losses or damages incurred as a result of relying on the information in this blog.
