What is NPS: Meaning, features & benefits

Retirement planning is important and various schemes help you prepare for your golden years. The National Pension System (NPS) is one of them. Read on, if you want to know what is National Pension System, its features and benefits and how to use it effectively to save for your retired life.

What is NPS?

NPS is a voluntary, government-sponsored pension programme designed to provide a stable income after retirement. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

NPS accounts come in two types: Tier I, which is non-withdrawable until 60 years, and Tier II, which allows withdrawals at any time. In the unfortunate event of your demise before 60 years, the accumulated sum is paid to your nominee or legal heir.

Your pension amount at retirement depends on the contributions you make during your working years and the market-linked returns on it. NPS also offers tax-saving benefits.

How does NPS work?

You regularly invest a portion of your income into the NPS account. Professional fund managers pool and invest these contributions in a diversified portfolio, including equity, corporate bonds, government securities and shares. You can choose your pension fund manager and investment options based on your risk appetite and retirement goals.

Upon retirement, 40% of the accumulated corpus must be used to purchase an annuity, providing a regular pension income. The remaining 60% can be withdrawn as a lump sum.

You can consider the Guaranteed Life Income Plan distributed by Axis Bank, which offers varied payout modes, like monthly, quarterly, half-yearly or yearly.

Objectives of NPS

Ensures a significant amount of savings to meet financial needs and expenses post-retirement
Provides a stable income stream during your retirement years
Encourages financial discipline by promoting regular savings throughout your working life

Features of the National Pension System

Liquidity and flexibility

Tier I account: Functions as a primary pension account with withdrawal restrictions. You can open this account with a minimum deposit of ₹500.
Tier II account: This voluntary account provides liquidity with the freedom to invest and withdraw funds. It requires a minimum deposit of ₹250 and can be opened only if you have an active Tier I account.
Unique ID: You will receive a Permanent Retirement Account Number (PRAN), which is used for all fund management and contributions.

Flexible investment

Auto choice: Investments are managed automatically by a fund manager based on your age profile.
Active choice: You can decide the asset classes and the percentage of funds to invest, with a maximum of 50% in equities (Asset Class E). Other classes include corporate debt (Class C) and government securities (Class G).

Partial withdrawal

You can make partial withdrawals of up to 25% of your Tier I contributions after a minimum tenure of 10 years.
There must be a gap of 5 years between two withdrawals, allowing you to access funds only during emergencies before retirement.

Eligibility criteria

You must be between 18 and 70 years of age on the date of application
Indian Residents, NRIs and OCIs are eligible
You need to fulfil the KYC requirements as specified in the subscriber registration form

How to open an NPS account?

Opening NPS account online

Visit the eNPS portal
Select your subscriber type and choose between Tier I or both accounts
Enter your PAN details and select a suitable bank or PoP for KYC verification
Upload scanned copies of your PAN card, cancelled cheque, photograph and signature
Choose your pension fund manager and the preferred investment option, and pay the account opening amount
Receive your PRAN upon successful payment

Opening NPS account offline

Locate a PoP, such as one of the designated Axis Bank NPS branches
Download and fill out a subscriber form and submit it with your KYC documents
Make the initial contribution
Receive your PRAN and a welcome kit with a password to operate your account

Tax benefits

Section 80CCD(1): Deduction up to ₹1.5 lakh for your contributions to Tier I, within the Section 80C limit
Section 80CCD(1B): Additional deduction up to ₹50,000 for Tier I contributions, over and above the Section 80C limit
Section 80CCD(2): Employer contributions to Tier I are deductible up to 14% for Central Government employees and 10% for others, exceeding the Section 80C limit.

Additional tax benefits

Withdrawals: Up to 25% of Tier I contributions are tax-exempt
Annuity purchase: Tax-exempt at purchase, but annuity income is taxable
Lump sum withdrawal: Up to 40% of the corpus is tax-free once you cross 60 years of age

Conclusion

NPS is a flexible retirement savings plan designed to help you save for your future. It offers multiple benefits, including tax advantages, which can reduce your tax burden, and a low-cost structure, meaning you pay less in fees. It provides a variety of investment choices, allowing you to select the best options based on your risk appetite and financial goals. By investing in NPS, you can build a secure financial foundation for your retirement while enjoying the benefits of tax savings and affordable investment management.

Also Read: How to build a robust retirement corpus with NPS?

FAQs

Who is eligible to join NPS?

Any Indian citizen aged between 18 and 70 years, including NRIs, can benefit from NPS.

How much pension is given in NPS?

Since NPS is a defined contribution scheme, your pension amount depends on your total contributions and the market-linked returns generated, with no fixed amount guaranteed.

Is NPS better than PPF?

NPS offers potentially higher returns owing to its market-linked investments, whereas PPF provides guaranteed returns.

Is NPS tax-free on maturity?

At maturity, 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity. The income generated from the annuity is taxable.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision