What is NPS (National Pension System): Features, Benefits & Returns

The following persons currently do not comply with applicable NPS eligibility criteria:

While all eligible are allowed to open a NPS account under the All Citizen's Model, not all salaried individuals can open a corporate NPS account. Currently the following entities are eligible to provide their employees subscription to the NPS corporate model:

1. Entities registered under Companies Act, 2003

2.Co-operative society registered under any law pertaining to the Co-operative Societies

3.Bodies established under notification/order issued by State/Central Government, Act of Parliament or any law enacted by state legislature

4.Government Company or Public Sector Enterprise

5.Registered Partnership Firms

6.Limited Liability Partnerships

7.Trusts/Society

8.Proprietary Concerns

Please note the above list is for illustrative purpose only and not exhaustive.

NPS allows you to change the pension scheme or fund manager, if you are dissatisfied with their performance. This option is available to both Tier I and Tier II accounts. A maximum of one PFM change request is allowed in a year and NPS subscribers can have separate PFM for Tier 1 and Tier 2 accounts. 

NPS Subscribers can modify their NPS Scheme Preference or Pension Fund Manager (PFM) online by logging into their NPS Account through the applicable website or the NPS Mobile Application. Subscribers can also choose the offline mode and send a written request to their Nodal Office / POP-service provider to change their NPS scheme preference and/or PFM.

Employees, who are contributing to NPS are eligible for following tax benefits on their own i.e. self-contribution:

Salaried individuals who have subscribed to Corporate NPS or Central/State Government NPS schemes are eligible for additional tax benefits on employer’s contribution to the scheme. The tax deduction allowed on employer’s contribution is up to 10% of salary (Basic + DA) for corporate NPS subscribers. Tax benefit on employer contribution is higher at 14% of Basic + DA if such contribution is made by Central/State Government.

This NPS tax benefit on employer contribution is as per rules under Section 80 CCD (2) over and above the limit of Rs 1.5 lakhs provided under section 80C and the tax benefit of up to Rs. 50,000 annually available u/s 80CCD(1B).

Self-employed persons who are contributing to NPS are eligible to receive the following tax benefits:

Apart from employees, employers offering Corporate NPS accounts to their employees are also eligible to avail tax deductions on making contributions into employee accounts. 

Currently employers can claim tax deduction on contribution of up to 10% of Basic + DA of the employee. This contribution amount is to be included the under the head "Business Expense" in the Profit & Loss Account to be eligible for tax deduction, as per the rules given u/s 36(1)(iv).

As per current rules, you are allowed to make a partial withdrawal from your NPS Tier 1 account to cater to an emergency or other financial requirement subject to some key terms and conditions. A maximum of 3 partial withdrawals are allowed during the entire NPS tenure and the maximum withdrawal allowed in one go is capped at 25% of the NPS Tier 1 account balance. 

These partial withdrawals from NPS allowed after completion of the initial 3-year lock-in period are exempt from taxes, basis the terms and conditions applied by PFRDA (Pension Fund Regulatory and Development Authority) u/s 10(12B).

On the other hand, NPS Tier 2 account allows unrestricted partial and complete withdrawals, however, the capital gains obtained on amount withdrawn is completely taxable under current rules.

The NPS corpus at the time of Tier 1 account maturity or superannuation can be used for the purchase of annuities to provide pension income post retirement. At present, minimum 40% of the NPS corpus at superannuation has to be mandatorily utilised to purchase annuities.

Under section 80 CCD (5), you are eligible for tax deduction on the amount used to purchase an annuity under NPS at superannuation after you turn 60 years old. However, the monthly income that you will receive by purchasing this annuity will be taxed as per your slab rate.

Complete withdrawal of NPS Tier 2 account can currently be done at any time without restrictions. However, the gains from Tier 2 account investments are completely taxable in the hands of investor as per applicable capital gains tax rules.

Complete withdrawal of NPS Tier 1 account balance is tax exempt, post superannuation i.e. after the subscriber attains the age of 60 years. Lump sum withdrawal of up to 60% of total corpus accumulated in the Tier 1 account upon superannuation is eligible for tax exemption, as per the rules stated u/s 10(12A).

Employees, who are contributing to NPS are eligible for following tax benefits on their own i.e. self-contribution:

Salaried individuals who have subscribed to Corporate NPS or Central/State Government NPS schemes are eligible for additional tax benefits on employer's contribution to the scheme. The tax deduction allowed on employer's contribution is up to 10% of salary (Basic + DA) for corporate NPS subscribers. Tax benefit on employer contribution is higher at 14% of Basic + DA if such contribution is made by Central/State Government.

This NPS tax benefit on employer contribution is as per rules under Section 80 CCD (2) over and above the limit of Rs 1.5 lakhs provided under section 80C and the tax benefit of up to Rs. 50,000 annually available u/s 80CCD(1B).

Self-employed persons who are contributing to NPS are eligible to receive the following tax benefits:

Apart from employees, employers offering Corporate NPS accounts to their employees are also eligible to avail tax deductions on making contributions into employee accounts. 

Currently employers can claim tax deduction on contribution of up to 10% of Basic + DA of the employee. This contribution amount is to be included the under the head "Business Expense" in the Profit & Loss Account to be eligible for tax deduction, as per the rules given u/s 36(1)(iv).

As per current rules, you are allowed to make a partial withdrawal from your NPS Tier 1 account to cater to an emergency or other financial requirement subject to some key terms and conditions. A maximum of 3 partial withdrawals are allowed during the entire NPS tenure and the maximum withdrawal allowed in one go is capped at 25% of the NPS Tier 1 account balance. 

These partial withdrawals from NPS allowed after completion of the initial 3-year lock-in period are exempt from taxes, basis the terms and conditions applied by PFRDA (Pension Fund Regulatory and Development Authority) u/s 10(12B).

On the other hand, NPS Tier 2 account allows unrestricted partial and complete withdrawals, however, the capital gains obtained on amount withdrawn is completely taxable under current rules.  

The NPS corpus at the time of Tier 1 account maturity or superannuation can be used for the purchase of annuities to provide pension income post retirement. At present, minimum 40% of the NPS corpus at superannuation has to be mandatorily utilised to purchase annuities.    

Under section 80 CCD (5), you are eligible for tax deduction on the amount used to purchase an annuity under NPS at superannuation after you turn 60 years old. However, the monthly income that you will receive by purchasing this annuity will be taxed as per your slab rate.

Complete withdrawal of NPS Tier 2 account can currently be done at any time without restrictions. However, the gains from Tier 2 account investments are completely taxable in the hands of investor as per applicable capital gains tax rules.

Complete withdrawal of NPS Tier 1 account balance is tax exempt, post superannuation i.e. after the subscriber attains the age of 60 years. Lump sum withdrawal of up to 60% of total corpus accumulated in the Tier 1 account upon superannuation is eligible for tax exemption, as per the rules stated u/s 10(12A).

The above screenshot is for the new NPS registration online portal. First, choose the appropriate options from the choices given below:

• Applicant Type (Individual Subscriber or Corporate Subscriber)
• Status of Applicant (Citizens of India or Non-Resident of India)
• Register with (Permanent Account Number)
• Account Type (Tier I & Tier II or Tier I only)
• Bank/ POP

Then, click on continue to proceed with the NPS registration completion.

The above screenshot is to complete the pending NPS registration. You’ll have to fill your Acknowledgement No, Acknowledgement Data, First Name, Date of Birth and Email Address. Select submit to continue.

You can sign in to the NSDL NPS server in two ways. First, if you have a password already. Another way is that if you have not created a password and are first signing into your PRAN account.

Here are the steps that you need to follow if you already have a password.

• Go to the NSDL NPS portal npscra.nsdl.co.in for the NPS login
• Click on the' Open or Add your NPS account ' button
• Next, you'll see a button saying, 'Log in with PRAN/IPIN' [3], click on it
• Enter your PRAN and password on the login screen, followed by 'Submit' for gaining access to your E-NPS account[1]. You'll need to create a password using the steps outlined below when you log in for the first time
  • Go the official portal of NSDL NPS (npscra.nsdl.co.in)
  • Click on 'Open your NPS account or contribute online'
  • Click next on, 'Log in with PRAN/IPIN'
  • Select 'eNPS password' to create a new password
  • Fill in your date of birth. Type the new password and then verify it. After entering the captcha and hit 'Submit'
  • You'll receive an OTP on your mobile phone. There will be an empty field reading' Access OTP,' and you'll need to key in the OTP to validate your new password
• You can now access your E-NPS account with the PRAN and the new password

• Go to the official KFintech CRA NPS portal - nps.kfintech.com
• Select “Login for existing subscribers”
• To log in to your E-NPS account, type your PRAN and Password on the login screen
• Follow the below steps to generate a new password
• Enter your PRAN and password on the login screen, followed by 'Submit' for gaining access to your E-NPS account[1]. You'll need to create a password using the steps outlined below when you log in for the first time
  • Click on the link “Click here to generate password” on the login screen
  • Enter your PRAN, date of birth and captcha. Once you click on submit, you will receive an OTP on your registered mobile number
  • The OTP will help you to set the new password
  • You can now login to your E-NPS account with this password

Step 1: Enter the monthly investment that you are planning to make towards the NPS account.

Step 2: Next, provide the rate of return you’re expecting from your investment in NPS.

Step 3: The next factor to consider is the age at the time of initiating your investment and the age till which you plan to continue making NPS investments. For example, if your current age is 25 years and you are planning to keep investing till your retirement at 60 years, the years of contribution would be 35 years (25-60). This is automatically calculated based on your inputs in the previous 2 steps.

Step 4: Following that, you must specify how much of the accrued NPS corpus upon retirement will be utilised to purchase annuities, as well as the estimated rate of return you will get from the annuities. The current minimum amount for purchasing annuities is 40% of the accumulated corpus at the time of superannuation/closure of account at retirement. However, you can also choose to purchase annuities up to 100% of your NPS corpus value at superannuation.

Step 5: After entering all the above-mentioned details, the NPS calculator will immediately display the following results:

An important point to note here is that if the total NPS corpus does not exceed Rs 5 lakhs, then the entire amount can be withdrawn in one go at superannuation after you have attained 60 years of age. A few additional reasons that make NPS stand out as a preferred long-term investment option for retirement include:

Currently, a person can withdraw up to 60% of their total corpus as a lump sum after retirement, with the remaining 40% mandatorily required to be invested in an annuity plan. As per current NPS withdrawal criteria, subscribers can withdraw the whole corpus if it is less than or equal to Rs 5 lakhs, without acquiring an annuity plan. These withdrawals are also tax free.

For an example - if a person has a corpus of Rs. 4.5 lakhs, they can withdraw the full amount at retirement. Similarly, if the total NPS corpus reaches a total of Rs 10 lakhs, the limit for tax-free withdrawal will be Rs 6 lakhs (i.e. 60% of the total corpus). For the remaining Rs. 4 lakhs, they must get an annuity plan, from which monthly pension amount will be sourced.

Although withdrawals are tax-free, annuity pay-outs are taxed according to your income tax slab rate. As a result, if your annuity is valued at Rs. 4 lakhs, it would be taxed at the individual's tax bracket rate. The payment is taxed in line with the year of payment.

When we say premature or early exit from NPS, we mean exit from NPS before the subscriber reaches 60 years of age or prior to account superannuation. Here are the various early withdrawal rules or exit rules for NPS:

Demise of the Subscriber: Another reason for premature withdrawal/NPS account closure can be due to the subscriber’s untimely demise. If the subscriber passes away during the NPS tenure, the subscriber's nominee(s)/legal heir(s) would get the whole accrued corpus as a lump sum. No mandatory purchase of annuities is applicable to such cases irrespective of the NPS corpus value.

The equity allocation of NPS i.e. Scheme E investment varies based on the age of the applicant. You are allowed to allocate a maximum 75% of your investment towards equities, if you are aged 30 years or younger at the time of account opening. The equity allocation rules also vary based on whether active choice or auto choice option is chosen by the NPS subscriber.   

If auto choice option is chosen, maximum equity exposure allowed is 75% in the case of Aggressive Life Cycle Fund, 50% Scheme E allocation is allowed in the case of Moderate Life Cycle Fund and 25% equity allocation is allowed at most in the case of Conservative Life Cycle Fund.

What's more, as the age of the applicant progresses, the NPS equity allocation will decrease such that by the age of 55 years, the maximum equity allocation will range between 5% and 15% depending on the life cycle fund chosen. The change in NPS equity allocation is designed to reduce the overall short-term volatility risk in the investment portfolio as the investor gets closer to retirement.