National Pension System (NPS) - Features, Benefits, Eligibility & Interest Rate

The government of India has launched many investment schemes to provide masses with safe and economic investment options. Apart from capital growth, building retirement corpus is one of the most significant aspects of financial planning for any individual. Government-backed National Pension System (NPS) is a go-to option for Indians looking to earn adequate income after retirement.

The voluntary scheme enables you to contribute towards retirement throughout your working life regularly. Let us have a look at what this scheme is and how it works.

What is NPS?

As mentioned above, NPS is a government-backed pension scheme launched by the Pension Fund Regulatory and Development Authority (PFRDA) in 2004. While the programme was only launched for government employees initially in 2009, it opened for all the sections including the NRIs.

After subscribing to NPS online or offline, one can regularly contribute to this pension account during their working life. After retirement 60% of the deposited amount can be withdrawn in a lump sum. The remaining 40% is used for purchasing an annuity from a life insurance company to earn a regular pension.

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Features of NPS

Here are the key features of NPS that need to be noted when investing:

1. Contribution Flexibility: NPS offers the freedom to contribute as per your financial situation and preferences. Whether you prefer regular contributions or occasional deposits, NPS adapts to your needs.
2. Investment Variety: You can invest in equities, bonds, and government assets through NPS. It's similar to having a menu of options to suit your comfort level and investment style.
3. Tax Benefits: By allowing you to deduct your contributions under Section 80C, NPS helps you reduce your tax liability. Moreover, NPS offers tax advantages for both withdrawals and annuity payments, making it a tax-effective way to save for retirement.
4. Portability Across Employment: If you change employment or locales, your NPS account remains with you, guaranteeing consistency in your retirement savings path.
5. Customised Management: With NPS, you can choose from multiple possibilities for your pension fund management. Every manager has a different strategy, so you can select the one that best fits your investing objectives.
6. Convenient Online Access: NPS offers an easy-to-use online interface which lets you track investments, keep an eye on your account, and make changes from the comfort of your home. 

All of these features create NPS, a flexible and easy retirement savings plan which helps people successfully prepare for and handle their post-retirement money.

Two types of NPS account

Subscribers are allowed to open two types of NPS account – Tier 1 and Tier II. However, you can only open Tier II account if you already have a Tier I account. The two major differences between the two are the tax benefits and withdrawal limitations. While there are certain withdrawal limitations in Tier I account, Tier II account does not enjoy the same tax benefits as Tier I.

Types of NPS Accounts

Tier 1 Account:

• This type of account is mandatory for NPS subscribers

• Government employees have to contribute 10 percent of their basic salary plus DA to this NPS account. The government makes an equal contribution

• For non-government employees, they have to open an account with a minimum of INR 500 and they have to contribute a minimum of INR 6000 every year

• For private sector employees, an option between an NPS and Employee Provident Fund (EPF) is given. If you go for NPS, you will have to make a contribution of about 10 percent of your basic salary plus DA. The employer will make an equal contribution. Keep in mind that the employer contribution is not taxable and comes under the Section 80 CCD2 on form 16 document

Tier 2 Account:

• The Tier 2 account is a non-mandatory account for NPS subscribers

• This is a type of NPS - all citizen model from which you can make withdrawals at any time

• Further, no contributions will be made by the government or the employer in this account

• No tax exemptions are available for investment into NPS through the Tier 2 account

• To open a Tier 2 account you would need a minimum of INR 1000 and a minimum contribution amount of INR 250

• Minimum account balance on Tier 2 accounts have to be INR 2000 at the end of each year

• The treatment of returns from Tier 2 accounts is the same as Mutual Funds

Who can Enrol?

Any citizen of India between the age of 18-60 years can open an account. This account is not compulsory for government of India employees who have joined before Jan 2004. However, for such individuals, it is voluntary.

Pension Benefits of NPS

Here are the pension benefits of NPS:

1. Steady Income After Retirement: NPS ensures you have a regular income once you retire so you can relax and enjoy your golden years.
2. Choose Your Payment Style: Decide whether you want your retirement money all at once or in smaller chunks over time, giving you control over your finances.
3. Save on Taxes: NPS not only helps you save taxes on your contributions but also lets you enjoy tax-free withdrawals, giving you extra money to enjoy during retirement.
4. Grow Your Savings with Market Opportunities: Your NPS investments have the potential to grow alongside the market, helping you build a bigger retirement fund.
5. Customise Your Annuity Plan: With NPS, you can select an annuity plan that fits your needs, whether it's for life, shared with a partner, or increasing over time.
6. Keep Your Benefits With Job Switch: Your NPS account remains with you whether you switch jobs or change cities.
7. Expert Guidance for Your Retirement Goals: Choose from different pension fund managers to help you maximise your retirement savings, each offering their investment strategies.
8. Access Your Savings Easily Online: NPS provides a user-friendly online platform which allows you to check your pension savings anytime, anywhere.
9. Build Your Dream Retirement: By saving regularly and making informed decisions, NPS helps you build a solid retirement fund, bringing you closer to your retirement dreams.

How to Open NPS Account

Looking to open an NPS account, here is a guide to help you:

1. Initiate Your Application: Begin by visiting the NPS official website and locating the "Apply Now" button.
2. Select Your Recordkeeping Agency: Opt for a Central Recordkeeping Agency (CRA) such as NSDL to handle your NPS account.
3. Complete the Online Form: Fill out the online form with all the required personal and financial information accurately.
4. Receive Your Acknowledgement ID: After submitting the form, an Acknowledgement ID will be generated, confirming your registration.
5. Finalise Registration Within 15 Days: It's important to finalise your registration within 15 days by using the provided Acknowledgement ID.

Where does PFRDA invest your money?

The money you deposit in your NPS account is invested by the fund managers regulated by the PFRDA. The investment is mostly made in diversified portfolios that consist of government bonds, company debentures, and shares.

As the investment is made in market-linked securities, the returns or the rate of interest offered by NPS varies as per the market conditions.

Minimum contribution and service charge

Any Indian, between the age of 18 and 65, can subscribe to NPS. The minimum contribution amount in a financial year is Rs. 1000 for a Tier I account. There is no minimum contribution amount for Tier II account, but you have to maintain a minimum balance of Rs 2000 in your Tier II account at the end of each financial year. The investment in both these accounts earns compound interest to help you earn high returns.

As per the NPS details, subscribers are also required to pay a service charge for their investment. For public sector employees, the service charge is 0.0102%. The same for private sector employees is 0.25%.

Tax benefit of NPS

As per the current tax provisions, NPS subscribers can get an additional tax benefit of up to Rs. 50,000 in a financial year under Section 80CCD (1B). This NPS tax benefit is over and above the tax-saving benefit of up to Rs. 1.5 lakh that it receives under Section 80CCE. However, you only get tax benefits on the contribution made towards Tier I account. Tier II account currently enjoys no tax exemption on contribution. However, as per recent announcements made by Finance Minister of India, Tier II accounts with 3-year lock-in will also soon enjoy tax benefits.

Methods of KYC Verification

Bank Account Details Verification: Your KYC will be verified using the details provided in your bank account.

• UIDAI Verification: KYC details will be cross-checked with UIDAI records also, to ensure accuracy and security.
• Provide Additional Details: Input additional information such as bank details, preferred scheme options, and nominee details as part of the registration process.
• Upload Required Documents: Upload essential documents like a recent photograph, signature, canceled cheque, bank statement/passbook, and PAN card copy for authentication purposes.
• Make Initial Contribution: Kickstart your NPS account by making an initial contribution of at least Rs. 500.
• Complete Payment Process: Finalize the payment process through net banking or a secure payment gateway.
• Receive PRAN and PDF Form: Upon successful registration, you will receive your 12-digit PRAN and a PDF form via registered email and SMS.
• Confirmation of Registration: To conclude the registration process, complete the confirmation step through e-sign or OTP verification to avoid physically submitting the registration form.

Ensure a seamless and hassle-free process to open your NPS account by following the steps detailed above and start planning for retirement.

NPS Interest Rate

A popular investment plan that is appreciated by many working people in India is the National Pension Scheme (NPS). It is helpful to remember that the NPS interest rate is dependent on the asset's performance.

It is impossible to predict the ultimate returns in advance in order to comprehend how NPS functions for interest rates. Since NPS is a market-linked investment plan, its performance depends on the performance of corporate debt, government debt, equity, and alternative assets.

How is NPS Calculated

The formula to calculate NPS is:

A = P (1 + r/n) ^ nt

Here, P represents the Principal Sum, A is the Amount, r stands for the Rate of interest, n denotes the instances of interest compounding, and t is the number of years.

For salaried employees, your contribution and your employer’s contribution to the NPS scheme are considered. If you contribute 10% of your salary monthly to NPS, your employer will match this amount. To estimate your future pension, you can use the NPS calculator.

NPS returns depend on the performance of underlying assets like equity, corporate bonds, government securities, and alternative assets. Fund managers allocate your investments across these assets.

Market conditions impact their value, making NPS returns upon retirement variable and somewhat unpredictable. However, analysing past performance can provide an estimate of expected returns.

How to login to your National Pension Scheme Account for the first time?

If you are new to logging in, you will need to create a password. Here's what to do:

1. Go to the NSDL NPS official portal at https://enps.nsdl.com/eNPS/NationalPensionSystem.html
2. Click on the "Login with PRAN/IPIN" button.
3. You will land on the login screen.
4. Hit the "Reset Password" link to make a new one.
5. Enter your PRAN, Date of Birth, new password, confirm new password and enter captcha.
6. Click "Submit".
7. You will get an OTP on your registered phone.
8. Enter the OTP to confirm your new password.
9. Now, you are all set to log in to your E-NPS account with your PRAN and the fresh password.

These steps make setting up your account easy, ensuring you can access your NPS info securely.

What is the user ID for NPS login?

Your IPIN is the password for accessing your NPS account online, and your PRAN is your user ID. To ensure security, your IPIN should be 8 to 14 characters long and must be alphanumeric, including at least one special character like #, $, or &. This combination helps keep your account safe from unauthorised access.

Always remember to create a strong, unique password that you can remember easily but others cannot guess. Regularly updating your IPIN can also enhance your account's security.

Subscribing to NPS

To start NPS investment, you need to get in touch with a POP (Point of Presence) appointed by the PFRDA. Most of the private and public sector banks are appointed as POPs. The POP-SP (Point of Presence-Service Providers) are the authorised branches of a POP that function as collection points.

So, to subscribe to NPS, you can contact a bank that is appointed as a POP. Many of the banks now allow you to start NPS account online.

Retirement planning with National Pension Scheme

It is essential to first understand the investment option or scheme thoroughly before investing. Now that you have a basic understanding of what is NPS and how it works; try to focus on the other essential aspects of the scheme to make a confident investment decision for your retirement.

FAQ’s

1. What is the National Pension Scheme (NPS)?

National Pension Scheme (NPS), is a popular long-term investment plan in India. It is a good investment option for retiring individuals introduced by the government of India. Anyone from the public and private sectors can apply for NPS. So, how does NPS work?

With this scheme, individuals can invest small amounts at regular intervals, and after retirement, they can withdraw a certain amount, and the rest will be received as a monthly pension.

2. How does NPS work?

In India, the National Pension Scheme, or NPS, is a well-liked long-term investing plan. The Indian government has promoted it as a viable investment choice for retirees. The NPS scheme is open to both public and private sector employees. How does NPS work, then? Through this system, people can invest modest sums on a regular interval basis. When they retire, they can withdraw a portion of the money and receive the remaining amount as a monthly pension.

3. Who can join NPS?

Here’s is a list of the eligibility criteria for who can join the NPS scheme in India:

• You must be an Indian citizen or NRIs to open a NPS account.
• Your age must be between the bracket of 18 to 70 years of age.
• You need to fulfill the required KYC paperwork.

4. What are the benefits of NPS?

Below are the major benefits of investing in NPS:

• Investments made under NPS are managed by experts called Pension Fund Managers (PFM).
• Investors can easily manage their accounts and the amount they wish to invest.
• NPS can be managed from anywhere in India.
• Investors can enjoy tax benefits up to 2 lakh.

5. Can I Have more than one NPS account?

No, you cannot have more than one NPS account; NPS does not allow the opening of multiple accounts for an individual. However, you can choose other investment options along with NPS for better returns in the long run.

6. How much should I contribute to NPS?

During tier 1 of NPS, you need to make a contribution of Rs. 500 as an initial amount and later contribute Rs. 500 in regular intervals of time. The annual contribution must be at least Rs. 1000 for an individual under NPS. For tier 2, you need to make an initial contribution of Rs. 1000 per individual.

7. How do I open an NPS account?

Want to open an NPS account? Here are the steps:

1. Online Method:

• Visit the eNPS website.
• Provide your PAN and bank details.

2. Offline Method: 

• Obtain a PRAN (Permanent Retirement Account Number) application form from a Point of Presence - Service Provider (POP-SP).
• Submit the form along with the required KYC documents.

3. For Government/Corporate Sector Employees:

• Approach your HR department or Pay and Accounts Office.
• This process is slightly different as every organisation has different ways.

DISCLAIMER

The contents of this document are meant merely for information purposes. The information contained herein is subject to updation, completion, revision, verification and amendment and the same may change materially. Read More