The National Pension System (NPS) is a government-sponsored retirement savings scheme designed to provide financial security to Indian citizens in their post-retirement years. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers a low-cost, tax-efficient, and flexible approach to long-term retirement planning.
What is the investment of NPS?
The National Pension System (NPS) invests in a diversified portfolio of assets to generate returns for subscribers. NPS funds are allocated across four asset classes: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A). Subscribers can choose between two investment options: Auto Choice and Active Choice.
Under Auto Choice, the asset allocation is automatically adjusted based on the subscriber's age, with equity exposure decreasing as retirement approaches. Active Choice allows subscribers to determine their own asset allocation, with a maximum equity exposure of 75% for those under 50 years old.
The equity component is capped at 50% for subscribers aged 60 and above to reduce risk. NPS has historically delivered annualized returns of 9% to 12% over the past decade. However, it's important to note that returns are market-linked and not guaranteed.
The scheme's investment strategy aims to balance growth potential with risk management, providing a potentially higher return compared to traditional fixed-income schemes while maintaining a level of stability for retirement savings.
NPS Benefits & Features
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to provide financial security to Indian citizens in their post-retirement years. It offers several key benefits that make it an attractive option for long-term retirement planning.
| Feature | Benefit |
|---|---|
| Tax Benefits | Tax deductions up to Rs. 2 lakh per annum under sections 80CCD(1), 80CCD(1B), and 80CCD(2) |
| Flexibility | Choice of investment options, fund managers, and asset allocation |
| Low Cost | One of the lowest cost investment products available |
| Portability | Account remains the same across jobs, locations, and sectors |
| Market-linked Returns | Potential for higher returns through diversified investments in equity, corporate bonds, and government securities |
| Partial Withdrawals | Allowed for specific needs after 3 years of joining, up to 25% of contributions |
| Regulated Scheme | Overseen by PFRDA, ensuring transparency and adherence to guidelines |
| Two-tier | Structure Tier I for retirement savings and Tier II for voluntary savings with more liquidity |
NPS offers a unique Permanent Retirement Account Number (PRAN) that remains constant throughout the subscriber's lifetime . The scheme allows for systematic investments and provides options for both lump-sum withdrawals and annuity purchases at retirement.
Upon reaching 60 years of age, subscribers can withdraw up to 60% of the accumulated corpus tax-free, while the remaining 40% must be used to purchase an annuity for regular pension income . For those exiting before 60, 80% of the corpus must be used for annuity purchase.
NPS also provides flexibility in choosing investment options. Subscribers can opt for either the Auto Choice, where asset allocation is adjusted based on age, or the Active Choice, allowing personal selection of asset allocation with certain restrictions.
The scheme is open to all Indian citizens between 18 and 70 years of age, including NRIs. It offers professional fund management and the ability to switch between fund managers and investment options. Overall, NPS combines the benefits of tax savings, potential for market-linked returns, and a structured approach to retirement planning, making it a comprehensive solution for long-term financial security.
What is PRAN?
Permanent Retirement Account Number (PRAN) is a unique 12-digit identifier issued to every subscriber of the National Pension System (NPS). It serves as a portable retirement account number that remains constant throughout the subscriber's lifetime, regardless of changes in employment or location.
The PRAN card is a crucial document for NPS participants, facilitating seamless management of their pension accounts and playing a pivotal role in the digitization of pension-related processes.
- Portability: PRAN remains the same across jobs, sectors, and locations, ensuring continuity in retirement savings.
- Unique identification: It prevents overlap and account-related issues, offering an easy tracking system for NPS investments.
- Access to NPS account: PRAN allows subscribers to monitor their account activities, savings, and other NPS scheme-related aspects.
To obtain a PRAN, individuals must complete the NPS registration process through authorized Points of Presence (POPs) or the online eNPS platform. The PRAN is essential for all NPS-related transactions, including contributions, withdrawals, and account management.
Who is eligible for NPS scheme?
National Pension System (NPS) has broad eligibility criteria designed to include a wide range of Indian citizens.
- Age: Indian citizens between 18 and 70 years old can join NPS
- Citizenship: Open to Indian citizens, including both residents and Non-Resident Indians (NRIs)
- Legal competence: Applicants must be legally competent to execute a contract as per the Indian Contract Act
- KYC compliance: Applicants must comply with Know Your Customer (KYC) norms
- Single account: Individuals can have only one NPS account
- Overseas Citizens of India (OCI): Eligible to open an NPS account
- Government employees: Eligible and often mandatory for central and state government employees
- Private sector employees: Can join NPS voluntarily, even if they have other retirement accounts like EPF
- Self-employed individuals: Eligible to join NPS
- NRIs: Can open an NPS account, subject to RBI and FEMA regulations
- Hindu Undivided Families (HUFs): Not eligible for NPS
- Persons of Indian Origin (PIOs): Not eligible to open an NPS account
Subscribers cannot open or operate NPS accounts jointly or on behalf of an HUF. After age 60, individuals cannot make further contributions to their NPS accounts.
NPS Account Types
NPS offers two types of accounts to subscribers: Tier I and Tier II. Here's a comparison of their key features.
| Feature | Tier I Account | Tier II Account |
|---|---|---|
| Purpose | Mandatory retirement account | Voluntary savings account |
| Tax Benefits | Eligible for tax deductions | No tax benefits (except for central government employees) |
| Withdrawal | Restrictions Restricted withdrawals before retirement | Flexible withdrawals allowed anytime |
| Minimum Initial Contribution | Rs. 500 | Rs. 1,000 |
| Minimum Annual Contribution | Rs. 1,000 | No minimum requirement |
| Lock-in Period | Until retirement (partial withdrawals allowed after 3 years) | No lock-in period |
While there is no maximum limit on NPS contributions, it's important to note that tax benefits are capped.
- Under Section 80CCD(1), employees can claim tax deductions up to 10% of their salary (Basic + DA), subject to an overall limit of Rs. 1.5 lakh under Section 80CCE.
- Self-employed individuals can claim deductions up to 20% of their gross income under Section 80CCD(1), within the Rs. 1.5 lakh limit of Section 80CCE.
- An additional tax deduction of up to Rs. 50,000 is available under Section 80CCD(1B), over and above the Rs. 1.5 lakh limit.
For government employees, the contribution is often fixed at 10% of their basic salary plus dearness allowance. Private sector employees have more flexibility in deciding their contribution amount.
It's worth noting that while there's no upper limit on contributions, investors should consider their financial goals, risk appetite, and overall investment strategy when deciding how much to invest in NPS. The scheme allows for both regular contributions and one-time investments, providing flexibility to subscribers.
National Pension Scheme returns
National Pension Scheme offers market-linked returns that vary based on the chosen investment option and fund performance. Here's an overview of recent NPS returns across different asset classes and schemes.
| Asset Class/Scheme | 1 Year Returns | 3 Year Returns | 5 Year Returns |
|---|---|---|---|
| Equity (Scheme E) | 15.19% - 40.31% | 16.83% - 18.65% | 13.13% - 14.39% |
| Corporate Bonds (Scheme C) | 6.89% - 16.36% | 6.98% - 8.05% | 8.40% - 8.99% |
| Government Securities (Scheme G) | 8.77% - 9.36% | 7.23% - 7.50% | 8.87% - 9.63% |
| NPS Tier 1 (Overall) | 9% - 12% annualized returns over the past decade |
The equity component (Scheme E) has generally delivered the highest returns, with 1-year returns ranging from 15.19% to 40.31%. Corporate bonds (Scheme C) and government securities (Scheme G) have provided more stable but lower returns, typically in the 6-10% range over various time periods.
It's important to note that NPS returns are not guaranteed and can fluctuate based on market conditions. The scheme's overall performance has delivered annualized returns of 9% to 12% over the past decade.
For government employees, as of June 2024, the UTI Retirement Solutions Fund generated the highest returns of 8.89% under the NPS state government scheme over the last five years. The LIC Pension Fund and SBI Pension Fund also performed well, with returns of 8.84% and 8.83% respectively over the same period.
The returns can vary based on the chosen pension fund manager and investment allocation. Subscribers have the flexibility to change their fund manager if they are not satisfied with the performance. It's advisable for investors to regularly review their NPS portfolio and adjust their asset allocation based on their risk appetite and financial goals.
NPS Fees &Charges
National Pension System (NPS) involves various fees and charges associated with account opening, maintenance, and transactions. These charges are levied by different intermediaries involved in the NPS ecosystem.
| Intermediary | Charge Type | Amount |
|---|---|---|
| Point of Presence (POP) | Initial subscriber registration | Rs. 200 - Rs. 400 |
| POP | Contribution processing | 0.50% of contribution (Min Rs. 30, Max Rs. 25,000) |
| Central Recordkeeping Agency (CRA) | Account opening (Physical PRAN card) | Rs. 40 |
| CRA | Annual maintenance | Rs. 69 |
| CRA | Per transaction | Rs. 3.75 |
| Pension Fund Manager | Investment Management Fee | 0.03% - 0.09% of AUM (slab-based) |
| Custodian | Asset servicing | 0.0032% p.a. |
| NPS Trust | Reimbursement of expenses | 0.005% p.a. |
These charges are subject to GST and may vary slightly depending on the specific intermediaries involved. The Pension Fund Manager charges are particularly noteworthy, with a slab-based structure ranging from 0.03% to 0.09% of Assets Under Management (AUM). It's important to note that NPS is designed to be a low-cost retirement savings option, with overall charges significantly lower than many other investment products.
How to open NPS Account?
To open an NPS account, individuals have two main options: online through eNPS or offline through Points of Presence (PoPs). Here's an overview of the process:
Online Registration (eNPS):
- Visit the eNPS website (www.enps.nsdl.com)
- Choose registration option and select "New Registration"
- Provide required details like PAN, Aadhaar, or other identification
- Fill in personal, contact, and bank details
- Select investment preferences and nominate beneficiaries
- Upload required documents (photo, signature, PAN card, etc.)
- Make initial contribution (minimum Rs. 500)
- Complete e-Sign or OTP-based verification
Offline Registration:
- Visit a PoP-SP (Point of Presence - Service Provider)
- Obtain and fill the PRAN (Permanent Retirement Account Number) application form
- Submit the form along with KYC documents and initial contribution
- Receive an acknowledgment receipt for tracking application status
Eligibility criteria include being an Indian citizen aged 18-70 years and complying with KYC norms. NRIs can also open NPS accounts, subject to specific conditions. The process is designed to be straightforward, with options to suit different preferences for account opening and management.
Conclusion
National Pension System presents a balanced approach to retirement planning, combining tax efficiency, flexibility, and the potential for good returns. It's particularly well-suited for individuals looking for a structured, long-term retirement savings option with professional fund management. However, as with any investment decision, it's advisable to consider personal financial goals, risk tolerance, and overall retirement strategy when deciding to invest in NPS.
