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  • Writer's pictureTeam ArthaPurna

National Pension Scheme

The National Pension System (NPS) is a voluntary, defined contribution retirement savings plan created to help members make the best choices for their future via methodical saving throughout their working lives. The NPS aims to help persons develop the habit of saving for their retirement. It is an effort to discover a long-term solution to the issue of giving each Indian person a sufficient retirement income.

The National Pension System (NPS) pools individual savings into a pension fund, which is then invested by PFRDA-regulated professional fund managers in accordance with approved investment guidelines in diversified portfolios that include shares, corporate debt obligations, government bonds, and bills. Depending on the profits received on the investments placed, these contributions would increase and accrue over time.

In addition to withdrawing a portion of the accumulated pension wealth as a lump sum, if they so desire, the subscribers may use the accumulated pension wealth under the scheme to buy a life annuity from a PFRDA accredited Life Insurance Company at the time of their retirement from NPS.


A citizen of India who meets the requirements, whether they are residents or not:

  • The applicant must be between the ages of 18 and 60 as of the day on which the POP/POP-SP receives the application.

  • The applicant must adhere to the Know Your Customer (KYC) standards outlined in the Subscriber Registration Form. Mandatory submission of all documents needed for KYC compliance is necessary.

Where does NPS invest?

NPS is much more varied in the asset classes it offers its subscribers than traditional retirement investing options like Employees Provident Fund (EPF) and Public Provident Fund (PPF). You can diversify your investments using NPS over 4 different asset classes:

  • Equities (E): The funds are put to use buying stocks and other equity-related products from Indian companies.

  • Corporate Debt (C): The funds allocated are generally used to purchase bonds and money market instruments from a variety of corporations, such as infrastructure companies, PSUs (Public Sector Units), and PFIs (Public Financial Institutions)

  • Government Securities (G): The funds are placed in money market instruments and bonds issued by the state and federal governments.

  • Alternative Investment Funds (A): The money is invested in new investment avenues like Commercial Mortgage-Backed Securities (CMBS), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Mortgage-Backed Securities (MBS), etc.

NPS Account Types

Account Type I: Permanent retirement accounts in Tier I are non-withdrawal accounts. Prior to 2011, there was a lock-in period that lasted until the subscriber became 60 years old. However, the regulating agency PFRDA made a few modifications in 2011. After 15 years of service, subscribers may prematurely terminate their subscriptions under the new rules.

It's important to understand that early withdrawals take the form of repayable advances. After 25 years of service, one is also eligible to withdraw up to 50% of their contribution. These withdrawals will aid subscribers in handling a variety of situations, such as acute illness and other situations requiring immediate financial support.

Account Type II: You can make as many withdrawals as you'd like from an NPS Tier-II account. Similar to a savings account, it operates. The only difference between this account and a savings account is that money withdrawals from this account take a little longer.

However, it’s important to understand that an NPS Tier II account can only be opened when one already has an active Tier I account. The minimum annual and monthly contributions to an NPS Tier I account are Rs. 6,000 and Rs. 500, respectively. In contrast, a Tier II account requires a minimum payment of Rs. 1,000 and charges Rs. 250 for each additional transaction. There are no tax deductions available for this account for either self-employed or private sector workers.

Which pension funds are listed under NPS?

A. Pension Funds (PFs) for Government Sector

  1. SBI Pension Funds Pvt. Ltd.

  2. LIC Pension Fund Ltd.

  3. UTI Retirement Solutions Ltd.

B. Pension Funds (PFs) for Other than Government Sector

  1. HDFC Pension Management Co. Ltd.

  2. ICICI Prudential Pension Fund Management Co. Ltd.

  3. Kotak Mahindra Pension Fund Ltd.

  4. Aditya Birla Sunlife Pension Management Ltd

  5. Tata Pension Management Limited

What is the right Asset Allocation?

As we previously indicated, in addition to giving you the choice of several asset classes, NPS also provides you the freedom to select the exact percentage that will be invested in each of these asset classes. This flexibility enables you to tailor your NPS asset allocation so that it is in line with your risk profile because each of these asset classes has a unique risk-return profile. You currently have the choice between Active Choice and Auto Choice when it comes to the asset allocation for your NPS account.

Active Choice

The NPS Active Choice option gives you the most freedom to decide how much of your portfolio is made up of equity, corporate debt, government securities, and alternative investment funds. However, there are some limitations on how much you can devote to particular investing options i.e., the most that may be allocated to alternative investment funds (AIFs) is 5% and up until the age of 50, a maximum of 75% equity exposure is allowed in NPS.

There is one additional criterion in addition to these two limitations. The maximum exposure to stocks that is permitted under NPS Auto Choice begins to decline at age 51 and decreases by 2.5% annually until it reaches 50%. Your equity exposure will therefore be 50% at age 60. Keep in mind that these are the maximum equity allocation restrictions allowed by NPS Active Choice. Regardless of your age, you can pick a lower equity allocation for your NPS portfolio as part of your overall investing plan.

The option to select the NPS asset allocation you believe is best suited to meet your investing objectives is the main advantage of Active Choice. Additionally, as you approach closer to retirement, the NPS Active Choice option automatically decreases the allocation of your NPS portfolio to equities and raises the share of debt investments to help lessen any potential volatility in your portfolio.

Auto Choice

You can automate your NPS asset allocation using the second option. The foundation of Auto Choice is the idea that as you become older and closer to retirement, your priority should be wealth preservation by reducing total portfolio risk. This is accomplished by adjusting your NPS asset allocation based on your age.

However, you also have some freedom with auto choosing. There are three alternative asset allocation models available in NPS Auto Choice. These are referred to as Life Cycle Funds, and they vary from one another in terms of the percentages assigned to various asset classes and the adjustments made based on your age.

What choices are there for subscribers to leave NPS when they reach retirement age or 60?

  • Account continuation: After turning 60 or reaching retirement age, subscribers may continue to make contributions to their NPS accounts (Up to 75 years). Additionally, this payment made after the age of 60 qualifies for special tax incentives under NPS.

  • Deferment (Annuity and Lump Sum Amount): Subscribers may postpone withdrawals and continue to invest in NPS until they are 75 years old. The subscriber has three options for deferral: only the lump sum withdrawal, only the annuity, or both the lump amount and the annuity.

  • Start your Pension: If Subscriber does not wish to continue/defer a NPS account, he/she can exit from NPS. He/she can initiate exit requests online and as per NPS exit guidelines start receiving pension.

Tax Benefits under NPS

1. Special tax benefit under Section 80CCD (1B)

Only NPS subscribers are eligible for an extra deduction for investments up to Rs. 50,000 in NPS (Tier I accounts) under paragraph 80CCD (1B). This is in addition to the section 80C deduction of Rs. 1.5 lakh permitted in the Income Tax Act of 1961.

2.Tax Benefits under the Corporate Sector:

  • Corporate Subscriber: -

Subscribers are eligible for an additional tax benefit under the Corporate Sector, Section 80CCD (2) of the Income Tax Act. Employer NPS contributions are tax deductible from taxable income up to 10% of pay (Basic + DA), without any upper monetary limit.

  • Corporates: -

Employer contributions to NPS can be written off as a "Business Expense" from their profit and loss statement up to 10% of salary (Basic + DA).

3. Tax advantages for partial withdrawals

Before turning 60, subscribers may make limited partial withdrawals from their NPS tier I accounts. Budget 2017 states that withdrawals up to 25% of subscriber contributions are tax-free.

4. Tax benefit for purchasing an annuity:

The amount invested in the purchase of an annuity is completely tax-exempt. The annuity income you receive in the succeeding years, however, will be taxable.

5. Tax benefit on lump sum withdrawal:

After the Subscriber turns 60, up to 40% of the total corpus that is withdrawn as a lump amount is tax-exempt.

For example, if your total corpus at the age of 60 is 10 lakhs, you can withdraw 40% of that amount, or 4 lakhs, without paying any tax. Therefore, you pay no tax at the time of retirement if you utilise 40% of the NPS corpus for a lump sum withdrawal and the remaining 60% for the purchase of an annuity. You will only be required to pay income tax on the annuity income you receive in the following years.

6. There is no tax benefit on investment towards Tier II NPS Account.

Withdrawal under NPS: -

  • Tier I account: A subscriber must spend at least 40% of their total pension corpus to buy an annuity that will give them a regular monthly income when they reach the age of superannuation or turn 60. The remaining money is available for lump sum withdrawal.

  • Tier II account: Only Tier I accounts are subject to the aforementioned NPS withdrawal regulations. A Tier II account has no withdrawal restrictions. Any amount from a Tier II account may be withdrawn by an investor as needed. According to NPS maturity regulations, the full amount may be taken if an investor retains the corpus until they reach retirement age. Taxes would, however, apply to this.

Withdrawal due to death of Subscriber: -

According to the PFRDA (Exits & Withdrawals under NPS) Regulations 2015 and its amendments, in the event of a Subscriber's death, the full accrued pension wealth of the Subscriber (100 percent NPS Corpus) shall be distributed to the Subscriber's Nominees or Legal heirs, as applicable. Though, the Nominee/Legal heir of the deceased Subscriber shall have the option to purchase any of the annuities being offered upon exit, if they so desire, while applying for withdrawal of benefits on account of deceased Subscribers’ Permanent Retirement Account. If nominee/legal heir wishes to opt for annuity (pension), they are required to select Annuity Service Provider (ASP) and annuity Scheme in Death Withdrawal Form.

Partial Withdrawal of NPS: -

Subscribers to the National Pension System have the option to request partial withdrawals online. Alternatively, they can provide a partial withdrawal form to the service provider's point of presence. The following conditions must be met for a subscriber to choose to partially withdraw from NPS.

  • Subscriber should be in NPS atleast for 3 years

  • The amount of the withdrawal cannot be more than 25% of the subscriber's contributions.

  • Three withdrawals are allowed at most during the subscription period.

  • Withdrawal is allowed only against the specified reasons, for example:

  1. Higher education of children

  2. Marriage of children

  3. For the purchase/construction of residential house (in specified conditions)

  4. For treatment of Critical illnesses

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