Must Knows

National Pension System: All about NPS

[] The National Pension System (NPS) is a voluntary contribution pension system that also allows its subscribers to save taxes

What is NPS?

The National Pension System is a voluntary pension fund scheme of the government of India. Regulated by the PFRDA (Pension Fund Regulatory & Development Authority), the NPS gives exposure to equity and debt instruments. A customer can build a pension fund by investing in this voluntary contribution pension system and also save taxes since the NPS is an EEE (exempt-exempt-exempt) instrument.

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NPS: How does it work?

An NPS subscriber contributes to his NPS account at regular intervals through the course of his retirement. After retirement, he can withdraw 60% of this amount as a lump sum. The remaining 40% of the NPS money is paid as a monthly pension.

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NPS account benefits

  • Voluntary
  • Retirement planning
  • Tax benefits
  • Portable
  • Cost-effective
  • Superannuation fund transfer has no tax implications

NPS eligibility

Barring people working in the armed forces, every citizen of India, whether employed in the public, private or unorganized sector, is eligible for the National Pension System.

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NPS investment options

Active choice

You can decide on the asset classes in which your contribution should be invested. You can also decide the percentages of this investment. These asset classes include:

  • Alternate assets or Asset Class A: High risk as the fund is invested in real estate and infrastructure funds.
  • Equity or Asset Class E: High risk-high return option.
  • Corporate bonds or Asset Class C: Low risk as the fund is invested in fixed income bearing debt instruments.
  • Government securities or Asset Class G: Low risk as the fund is invested in government securities.

Auto choice

Under lifecycle funds, the management of investment of funds is done automatically, based on the age of the subscriber. Moderate Lifecycle Fund is the default option under NPS. However, you can pick one of the 3 lifecycle funds:

  • Aggressive Life Cycle Fund (LC75)
  • Moderate Life Cycle Fund (LC50)
  • Conservative Life Cycle Funds (LC25)

NPS tax benefits

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In the case of NPS, an investor is given income tax exemption on maturity and the whole pension withdrawal amount. Tax benefits are offered to NPS subscribers under Section 80CCD.

Against self-contribution: Under Section 80CCD (1), 10% of your salary or Rs 1.50 lakhs, whichever is lesser, can be claimed as the tax deduction against self-contribution. You can also claim a tax deduction of up to Rs 50,000 under section 80CCD (1B) against self-contribution.

Against employer contribution: Section 80CCD (2) allows deductions against the employer’s NPS contribution. The deduction amount will be lowest of:

  1. Actual contribution made by the employer
  2. 10% of basic salary + dearness allowance
  3. Gross total income.

The employer tax benefit is capped at up to Rs 7.5 lakh for NPS, PF and superannuation.

NPS withdrawal at 60

As mentioned earlier, you can withdraw 60% of your NPS money as a lump sum. This money is tax-free.

NPS withdrawal before 60

Those who have been contributing to the NPS account for more than three years can withdraw 25% of the corpus for specific purposes. You can make such withdrawals thrice, at a gap of 5 years.

NPS account types

All citizen model: Where only the subscriber makes the contribution.

Corporate model: Where the subscriber and his employee both make contributions.

Anyone opening an NPS account (Tier-1 account) can open a sub-account, known as a Tier-II account.

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Tier-I account: A restricted and conditional withdrawable retirement account. You can withdraw only upon meeting the exit conditions.

Tier-II account: Voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers are free to withdraw their savings whenever they wish.

While money from the Tier-II account can be transferred to Tier-I, the opposite is not allowed. Tax benefits are also not offered on the Tier-II account.

NPS account contribution

All citizen NPS model Tier-I Tier-II
Minimum contribution at the time of account opening Rs 500 Rs 1,000
Minimum amount per contribution Rs 500 Rs 250
Minimum total contribution in a year Rs 1,000 Not applicable
Minimum frequency of contributions Once a year Not applicable

How to open an NPS account?

Online: You can open an NPS account, using the following websites:




Offline: Locate a Point of Presence Service Provider (POP-SP) to get an NPS registration form. To know the details of your nearest POP, visit NSDL CRA.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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