What is NPS? – inSummary

What is NPS?

NPS stands for National Pension Scheme which is a Retirement benefit scheme run by Govt of India. Under this scheme, the subscriber gets regular pension post retirement (60 years of age).
National Pension Scheme was launched from 2004 onwards for employees of Govt of India and then from 2009 onwards for employees of private companies.

Who regulates NPS?

NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA),an autonomous body set up by the Government of India to develop and regulate the pension market in India.

The recordkeeping, administration and customer service functions for all subscribers of the NPS are being handled by the National Securities Depository Limited (NSDL) , which is acting as the Central Recordkeeper for the NPS

Annuity Service Providers (ASPs) would be responsible for delivering a regular monthly pension to the subscriber after exit from the NPS.

Who can join NPS?

Any citizen of India, whether resident or non-resident aged between 18 – 60 years as on the date of submission of his/her application can join NPS. OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and HUFs are not eligible.

An NRI can also join NPS. NRI should have an account with a bank in India to open an account under NPS. The contribution made by an NRI is subject to regulatory requirements as prescribed by RBI from time to time and FEMA requirements.

Indian citizen having dual citizenship can also join NPS until the person carries valid Indian Passport.

How does NPS work?

The subscriber to NPS Scheme will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber’s life.

In this scheme, an investor can open two accounts using allotted PRAN:
a. Tier I account – A non-withdrawable permanent retirement account. Amount from this account can be withdrawn only upon meeting the exit conditions prescribed under NPS.
b. Tier II account – A voluntary withdrawable account.
Tier II account can be opened only when you have an active Tier I account.

NPS is a market linked Scheme. Amount invested in NPS accounts are managed by Fund Managers appointed by PFRDA.

Following are the currently appointed 7 Fund Managers:
1. HDFC Pension Fund
2. ICICI Prudential Pension Fund
3. Kotak Pension Fund
4. LIC Pension Fund
5. Reliance Capital Pension Fund
6. SBI Pension Fund
7. UTI Retirement Solutions

Are there any minimum annual contribution requirements under National Pension Scheme?

 TIER ITIER II
Minimum Contribution at the time of opening the accountRs 500/-Rs 1000/-
Minimum Amount per ContributionRs 500/- Rs 250/-
Minimum Total Contribution in a yearRs 1000/-No minimum contribution required
Minimum Frequency of the contributionOnce in a yearNo minimum frequency of the contribution

What are the charges and penalty for non-compliance of mandatory minimum contributions ?

– If the subscriber contributes less than Rs. 1,000 in a year, his/her account would be frozen and the facilities provided by CRA such as online view of account etc. will be restricted.

– In order to reactivate the account, the subscriber would have to pay the minimum contributions of Rs. 500/-

– A frozen account shall be closed when the account value falls to zero.

What are the Tax Benefits of availing National Pension Scheme?

NPS is currently subject to the Exempt Exempt Tax (EET) model. This means that contributions to NPS and accumulation/growth of pension amount are not taxed, but the withdrawn amount is taxed.

Following are the tax benefits of availing National Pension Scheme:

Type of SubscriberContribution fromTax DeductionIT SectionMaximum Deduction
SalariedEmployeeUpto 10% of Salary (Basic + DA)80 CCD(1)Rs 1.5 Lakh (under Sec. 80 CCE). Additional deduction of Rs50000/- under Sec. 80CCD (1B)
SalariedEmployerUpto 10% of Salary (Basic + DA)80 CCC(2)
Self EmployedSelfUpto 20 % of Gross Income (Earlier it was 10% of Gross Income)80 CCD(1)Rs 1.5 Lakh (under Sec. 80 CCE). Additional deduction of Rs50000/- under Sec. 80CCD (1B)

Note –
Section 80CCE is not the separate deduction, hence the deduction Under section 80CCE will be considered as total sum of the contribution made under section 80C,80CCC and 80CCD(1) excluding the additional deduction of Rs50000/- under Sec. 80CCD (1B)

Can a person open more than one NPS account?

No, a person can open only one NPS account with mandatory Tier I account, and optional Tier II account.

How much of the total accumulated pension amount can be withdrawn on attaining the age of 60 years?

One must invest at least 40% of total accumulated Pension amount into an Annuity and can withdraw rest 60% in lumpsum.
The subscriber can also purchase Annuity for 100% of the total accumulated Pension amount.

Annuity is a financial instrument which offers monthly/quarterly/annual pension at a specified rate for the period one chooses.
Annuity will be paid through direct bank transfer to the specified subscribers account only through Annuity Service Providers.

How much of the total accumulated pension amount can be withdrawn before attaining the age of 60 years?

As per the recent circular dated 10-Jan-2018:

A partial withdrawal of not more than 25% (of the contribution made by the subscriber and excluding contribution made by employer) is permitted for following purposes:
1. For higher education of his or her children including legally adopted child
2. For marriage of his or her children including legally adopted child
3. For the purchase or construction of a residential house or flat in his or her own name or in joint name with his or her legally wedded spouse. In case the subscriber already owns a residential house or flat other than ancestral property the no withdrawal is permitted
4. For treatment of specified illness of subscriber or his her spouse, children , parents. List of specified illness can be found here

Eligibility criteria for partial withdrawal:

1. Subscriber of NPS for atleast 3 years from the date of joining NPS

Note – The subscriber shall be allowed to withdraw from NPS only for maximum 3 times during the entire tenure of subscription under NPS.

What happens to Pension amount when pensioner dies before attaining the age of 60 years?

If the pensioner dies before attaining the age of 60 years, then 100% of accumulated pension amount would be paid to the nominee or the legal heir of the subscriber and there would not be any purchase of annuity/monthly pension.

What happens to Pension amount when pensioner dies after attaining the age of 60 years?

As explained earlier, on attaining the age of 60 years, one must purchase an Annuity. Hence, if pensioner dies after attaining the age of 60 years (assuming Annuity is already purchased) then the payment will depend on the type of annuity plan / scheme selected by the subscriber while buying the annuity

Note – More information on NPS can be found at: http://www.pfrda.org.in/

Click here to know step by step procedure to apply NPS Online

Disclaimer: If you find any discrepancies in this article then please contact us

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