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National Pension System

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The National Pension System (NPS) is a voluntary, long-term retirement savings scheme launched by the Government of India in 2004. The National Pension System(NPS) aims to provide retirement income to all citizens of India, including those in the unorganized sector, who may not have access to formal pension schemes. It allows individuals to contribute regularly towards their pension during their working life.

NPS Account

This is the dedicated retirement account where you make regular contributions, which are then invested based on your chosen scheme/fund manager.

Min. Contribution
500/-
Account Type
Individual Pension
Min. Annual Contribution
1000/-
Taxation At Maturity
60% Lump Sum Tax-Free,
40% Taxable Annuity
Extra Tax Benefits
50,000/-
Lock-In
Till Age 60
Expected Return
Market-Based Returns
Eligibility Age
18-70 for NPS application
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Key Features

National Pension System Details are as follows :-

  • (I) Voluntary participation : Individuals can voluntarily enroll in the NPS and contribute towards their retirement savings.

  • (II) Tiered structure : The NPS has two tiers - Tier I and Tier II. Tier I is a mandatory pension account with restrictions on withdrawals, while Tier II is a voluntary savings account with greater flexibility in withdrawals.

  • (III) Tax benefits : Contributions made to the NPS Tier I account are eligible for tax benefits under Section 80CCD of the Income Tax Act, providing individuals with incentives to save for retirement.

  • (IV) Choice of investment options NPS subscribers can choose between different investment options, including equity, government securities, corporate bonds, and alternative investment funds. This allows subscribers to tailor their investment strategy based on their risk
    appetite and retirement goals.

  • (V) Maturity : Upon reaching the retirement age, subscribers can withdraw a portion of their accumulated savings as a lump sum and use the remaining amount to purchase an annuity, which provides a regular pension income.Upto 60% of the total corpus withdrawn in lump sum is exempt from tax. Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.However, only in the case where pension corpus is less than Rs.2,00,000, it can be withdrawn 100% as lump sum.

  • (VI) Premature Withdrawal: Premature withdrawal is not available under Tier I account. However, Partial withdrawal is only available under special circumstances and with certain conditions.

Additional Tax Benefits

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B) : An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Apart from tax benefits available under 80CCD, below are the other tax benefits available under NPS :
  • (I) Tax benefits Maturity - Upon reaching the retirement age, subscribers can withdraw a portion of their accumulated savings as a lump sum and use the remaining amount to purchase an annuity. Up to 60% of the total corpus withdrawn in lump sum is exempt from tax.

(II) Tax benefit on Annuity purchase Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.

NPS Pension Calculator

This pension calculator illustrates the tentative Pension and Lump Sum amount an NPS subscriber may expect on maturity based on regular monthly contributions, the percentage of corpus reinvested for purchasing annuity, and assumed rates in respect of returns on investment and annuity selected for.

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Please note : Tax benefits are applicable for investments in Tier I account only.

Types of Accounts

NPS scheme is structured into two tiers

Tier-I NPS account
This is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer and are credited and invested as per the scheme/fund manager chosen by you.

Tier-II NPS account
This is a voluntary / optional withdrawable account which is allowed only you have an an active Tier I account. The withdrawals are permitted from this account as and when you require.

Tier – I Account Tier – II Account
Individual Pension Account Optional Account and requires an active Tier-I Account
Withdrawal as per Exit & Withdrawal rules and regulations Unrestricted withdrawals
Minimum contribution to open is Rs.500/- Min. Contribution to open is Rs.250/-
Min. Contribution per year is Rs.1000/- There’s no restriction on min. Contribution per year
AMC charges applicable No separate AMC charges applicable
- Anytime switching to Tier-I allowed

You need to choose the asset classes as well Pension Fund Manager (PFM) along with the percentage allocation to be done in each scheme.

There are four asset classes from which the allocation is to be specified under a single PFM

(i) Asset Class E – Equity and related instruments

(ii) Asset Class C – Corporate debt and related instruments

(iii) Asset Class G – Government Bonds and related instruments

(iv) Asset Class A - Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc

While choosing the asset class, subscribers must note that

(i) Percentage contribution value cannot exceed 5% for Alternative Investment Funds

(ii) The total allocation across E, C, G and A asset classes must be equal to 100%.

(iii) For Tier-II, you can allocate 100% to Equity.

(iv) For Tier-I, you can allocate 75% to Equity.

Active Choice

Under Active Choice, you can plan and choose on how your contribution is to be invested. You can choose the PFM, the scheme(s) as well as the percentage allocation in the asset classes.

Asset Class Maximum allocation of investment in the asset class
E Up to 75%
C Up to 100%
G Up to 100%
A Up to 5% .
Note: Investment in Asset Class A is available only for NPS Tier 1 account.

Auto Choice

NPS offers an easy option for you to invest in a Life-cycle fund in which the proportion of funds invested across three asset classes that are determined by a pre-defined portfolio and would change as per your age.

As age increases, your exposure to Equity and Corporate Debt tends to decrease under Auto Choice. Depending upon your risk appetite, there are three different options available within ‘Auto Choice’ – Aggressive, Moderate and Conservative.

(i) LC75 – Aggressive Life Cycle Fund

(ii) LC50 – Moderate Life cycle fund

(iii) LF25 – Conservative Life cycle fund

Frequently Asked Questions (FAQs)

Yes, the nomination is mandatory. You can appoint up to 3 nominees for both NPS Tier 1 and Tier 2 Accounts.

Normal Exit on Superannuation
  • • 100% Lump sum withdrawal allowed if the corpus is < or = 5 Lakh.
  • • If the corpus is >5 Lakh, at least 40% of the corpus to be utilized for purchase of an Annuity and balance 60% is paid as lump sum.
Premature Exit
  • • 100% Lump sum withdrawal allowed only if the account is more than 5 years old and the corpus is - or < 2.5 Lakh.
  • • If the corpus is > 2.5 Lakh, at least 80% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of an Annuity
  • • The balance 20% is paid as lump sum to the Subscriber.

The entire accumulated pension wealth of the subscriber payable to the nominee or legal heirs if the Subscriber dies before or after attaining 60 years. However, the nominees can opt for annuity if they desire so.

If the death of the NPS subscriber occurs before the due date of an extended period of purchase of an annuity, the entire accumulated pension wealth of the subscriber shall be paid to the nominee(s) or legal heir(s), of the subscriber.

Upon exiting Tier-I, the Tier-II account is automatically closed, and the remaining amount is paid to the subscriber, nominees, or legal heirs.

Yes, you are eligible for exit from NPS in case of physical incapacitation or suffering bodily disability leading to incapability to continue under NPS.

Disability certificate from a government surgeon or doctor. The certificate must state the nature, and extent of disability, and certify the inability to perform regular duties, the real possibility of not being able to work for the remaining life, disability percentage exceeding 75% according to the certifying doctor.

You will continue to remain subscribed to the NPS up to the age of 75 (seventy-five) years.

Yes, the subscriber has the option to purchase an annuity at any point in time during the deferment period by submitting a request to NPS Trust or any intermediary or entity authorized by the Authority for this purpose.

  • ● Higher education or marriage of children
  • ● Purchase or construction of residential property (excluding ancestral property)
  • ● Treatment of specified illnesses including cancer, kidney failure, stroke, etc.
  • ● Medical and incidental expenses due to the subscriber's disability or incapacitation
  • ● Expenses for skill development, self-development, or establishment of ventures/start-ups, as per Authority guidelines.

Disclaimer :-

  • (i) The FAQs provided above are sourced from https://www.npstrust.org.in/faqs. For additional questions or detailed information regarding FAQs, please refer to the provided source link.

  • (ii) Disclosure Investments in the National Pension System (NPS) are subject to market risks. It is advisable to thoroughly review all associated documents before proceeding with any investment decisions.

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