NPS Full form is National Pension Scheme. NPS scheme is a Central Government of India Retirement Scheme launched in 2009. The National Pension Scheme is regulated by PFRDA ( Pension Fund Regulatory Development Authority).
NPS Scheme – Post last updated on 9 Jan 2025
The simple reason for launching NPS was to inculcate the habit of saving /investing among the investor so that they start investing for their retirement from the beginning (of their career).
Another reason is to be sure that more and more people have NPS pensions to support them in old age.
Finally, the focus of the scheme is to help investors save money for retirement and also provide income when they retire.
Table of Contents
What is NPS Scheme?
NPS is a retirement scheme therefore one has to contribute to the NPS Scheme till the retirement age i.e. till the age of 60. Thereafter one gets a pension for life.
The pension amount depends on the amount you utilize for annuity purposes and the option you choose while selecting an annuity.
Watch National Pension Scheme on Youtube
National Pension Scheme/ NPS
Who can Open National Pension Scheme
Any Indian resident or NRI / OCI between age 18 years but below 70 (earlier it was 65), can invest in NPS. The account will be closed if the citizenship status of the NRI changes from NRI to foreigner.
National Pension Scheme-NPS Tier 1 and NPS Tier 2
There are two types of NPS accounts:
- NPS TIER 1
- NPS TIER 2
NPS TIER 1 account
The Tier 1 NPS Account is the basic account ( mandatory) to start NPS contribution. Therefore, by default one has to open Tier 1 in NPS.
All tax related benefits are attached to NPS tier 1 account only.
NPS TIER 2 account
TIER 2 account is an add-on account (optional) that offers the flexibility to invest and withdraw from various schemes available in NPS without any exit load.
Nevertheless, you may consider your NPS tier 2 account to be a savings account with an investing option similar to NPS.
Thus you can withdraw money any time as per your wish from the TIER 2 Account.
Tier 1 Account is Mandatory to open NPS Tier 2 Account
Difference between Tier 1 and Tier 2 NPS
| the Particulars | NPS Tier 1 | NPS Tier 2 |
| status | Compulsory | Optional Account with Active tier 1 Account |
| minimum contribution to open the Account | INR 500 | INR 1000 |
| minimum Yearly Contribution | INR 1000 | INR 250 |
| Maximum contribution | no limit | no limit |
| Tax Exemption | up to INR 200000( 80C & 80CCD(1B)) | NO Tax benefit |
| withdrawal | Permitted with limitations | Any amount can be withdrawn anytime |
NPS investment Option – Auto Choice vs Active Choice
Once you open the NPS account, there are two investment Options from which you have to make a choice
- AUTO CHOICE- Who do not want to manage their investment themselves
- ACTIVE CHOICE – Who wants to manage their investment themselves
Before explaining about Auto and Active choice let us understand the Investment options ( or asset classes or the funds/securities in which your money will be invested ) in NPS.
What is ECGA in NPS
In NPS Tier 1 and 2, money is invested across different asset classes. These asset classes are ECGA.
The money is invested across all ECGA categories but the percentile or amount is different ( the amount invested across in these asset classes depends on AUTO or ACTIVE CHOICE).
There are 4 asset classes (Investment options) in NPS. You can call it ECGA in NPS
| E- Equity | Invest in Equity Related Instruments | (High Risk – High Return) |
| C- Corporate bonds | The Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments | (Moderate risk- moderate return) |
| G- Govt. Bonds. | Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments | (Low risk – low return) |
| A- Alternative assets | Alternative assets like real estate investment trust (REIT) & Infrastructure investment trusts ( InvIT) | ( Very high risk – very high return) |
What is NPS Auto Choice
NPS auto choice is for passive investor who want to let an automatic allocation choose how much money is divided throughout the available asset classes.
Under Auto choice, the investments will be made in a life-cycle fund where different allocation of funds will be given based on life cycle fund you have chosen.
Under Auto choice,One can opt Life cycle based on Risk Profile
- Aggressive Life Cycle – Maximum Equity Contribution is 75%
- Moderate Life Cycle and -Maximum Equity Contribution is 50%
- Conservative Life Cycle Fund-Maximum Equity Contribution is 25%
What is Active Choice in NPS
Active Choice: Under Active choice in NPS, one has the option to choose their own investment allocation
A NPS subscriber may expose themselves to a maximum of 75% equity. Corporate or government bonds, however, allow for 100% investment.
How to buy NPS (NPS Account Opening)
There are two ways for NPS Registration
- Offline Mode
- Online Mode
Physical or Offline mode
To open NPS account you have to deposit your documents with POP-SP (point of presence service provider).Banks, post offices, and other non-financial institutions are included in the complete list of POP- SP.
To know the details of your nearest POP, please visit the link given below
https://npscra.nsdl.co.in/pop-sp.php
Procedure to open NPS Account Offline Mode
- Visit the link and download POP- SP details
- choose service provider as per your convenience
- submit KYC form along with NPS registration form to POP-SP.
- Post registration, PRAN (Permanent Retirement Account Number) is given
PRAN (Permanent Retirement Account Number) is a 12 digit unique and portable number issued by PFRDA. You can correlate PRAN with your saving bank account number.
When you open a bank account, you get an account number. Similarly when you open NPS (pension account) you get PRAN.
Please note that for Government employees, there are nodal office from where they get PRAN or they get it at the time of joining.
How to register NPS Account Online / eNPS
- visit the eNPS website or download eNPS mobile app
- Click on National pension System
- Choose Registration and click
- Register using Aadhar Online/Offline e- KYC ,PAN number, CKYC number or through documents of digilocker
- Choose Applicant type – Individual/ Corporate/ Government
- Residential status
- Choose your Account as Tier 1 ( pension Account )
- Give PAN or other details
- Choose your POP-SP bank ( ensure your Net banking is active)
- Fill personal details, family details, contact, bank, Scheme and nomination details
- Upload documents
- Upload photo & signature
- make payment of minimum amount Rs 500
Who regulates NPS and Fund Managers
NPS is regulated by PFRDA i.e. Pension Fund regulatory and Development Authority.
Furthermore the money is managed by Pension Fund managers, which are authorized by PFRDA.
As an investor, you have the freedom to choose any fund manager of your preference, and you are also free to change your fund manager in subsequent years.
NPS Fund managers
- Aditya Birla Pension Fund
- Axis Pension Fund
- HDFC Pension Fund Company
- ICICI Prudential Pension Fund
- Max Life Pension Fund
- Kotak Mahindra Pension Fund
- LIC Pension Fund
- SBI Pension Fund
- Tata Pension Fund
- UTI Retirement Solution Pension Fund
How National Pension Scheme Works?
Let’s take you on the journey of an NPS Subscriber.
Daulat 26 want to invest in NPS and want to understand how National Pension Scheme works.
Let’s step into Daulat journey to purchase NPS
- In the beginning, the Daulat has to compulsorily purchase an NPS Tier 1 Account.
- Now choose between active and auto choice.
- If Daulat chooses auto choice – then he has to further choose from different life cycle – LC 25, LC 50, LC 75. He can choose life cycle fund as per his risk appetite. He does not to make any choice here except LC 25,50 and 75. Rest will addressed as per matrix. ( given above)
- LC 25 – will allow him to keep a maximum equity allocation 25% and rest of money in c- class and G class.
- LC 50 – will allow him to keep maximum equity allocation 50% and rest of money in c- class and G class.
- a LC 75 – will allow him to keep maximum equity allocation 75% and rest of money in c- class and G class.
- If Daulat chooses Active Choice than the maximum equity allocation allowed is 75% and maximum alternate asset -5%.
- If he wish he can make partial withdrawal in between for a maximum of 3 times in the entire duration. Maximum withdrawal is 25% of the sum. Partial withdrawal is allowed after 3 years of regular contribution.
- Premature exit is allowed before age 60 but in such a case, compulsory annuity purchase from 80% amount and rest 20% can be withdrawn lumpsum.
- At age 60, Daulat can withdraw 60% as lumpsum and start taking pension from 40% money.
- Also the best part is tax deduction under section 80C and 80 DD ( 1 B ).
Income Tax Benefit in NPS
If you are an employee than your contribution is divided in two parts i.e Employee contribution and Employer contribution.
Employees own contribution in NPS
will get tax deduction under section 80CCD 1 but the amount of contribution should not be more than 10% of basic and dearness allowance.
Moreover this limit is under the ceiling of 1.5 Lakh Of section 80C to 80 CCE.
While this limit is 20% of the entire income in full financial year for self employed people .
Employer contribution
Employer contribution will also get exemption under Section 80 CCD (2) for 10% ( now increased to 14%) of basic and dearness allowance. ( This amount can be a part of salary but it will not be counted in 1.5 lac ceiling.
Additional Rebate
All individuals can also get INR 50000 tax exemption U/S 80CCD (1B) over and above 1.5 lac ceiling.
NPS withdrawal Tier 1 Account for (Govt. Employees & Non Govt. Applicants)
Please read the post NPS Withdrawal rules
NPS Withdrawal after Retirement ( Online)
NPS online Withdrawal procedure starts six months before retirement. Consequently pension will start just after completion of your retirement age.
Withdrawal Steps
Step 1 – Login to NPS using PRAN and Password
Step 2 – Go to Exit Withdrawal request and select initiate withdrawal
Step 3 – Select withdrawal type i.e. Exit at 60
Step 4 – Select ratio of Lump sum & Pension
Step 5 – Select One Annuity Service Provider
Step 6 – Verify all details and submit request form
Step 7 – Download request form
Step 8 – Sign and submit the request form to POP or Nodal Office
After 4 working days, lump sum amount will be credited to registered account. For pension all the details will be sent to ASP, once ASP processes all the details, you will start getting pension.
NPS Withdrawal after Retirement ( Offline)
You have to submit withdrawal application to any POPSP or NODAL office along with the required documents. After your submission, your withdrawal request will be forwarded to CRA ( Central Record Keeping Agency) and NSDL.
CRA will register the request and issue withdrawal form.
Now you have to fill all Details and the percentage of lump sum and annuity and annuity provider and annuity plan option as for your requirement. Once your required request is processed lump sum amount will be credited to your account and pension will start from your age 60.
Partial Withdrawal
Although NPS is a Pension product and withdrawal was not allowed before retirement. But to add a little more flexibility to the product now you can withdraw in special circumstances.
You can withdraw 25% in total of your contribution in NPS.
One is eligible to withdraw after 3 years of your investment and only for 3 times in entire duration of NPS.
NPS withdrawal is possible for the below stated reasons:
- Children’s wedding or higher studies
- Building/buying a house
- purchase or construction of residential house or flat
- Critical illness of self/family
- Disability of more than 75%
- Skill development or any other self development activities
- establishing of own venture or start up
NPS pension Calculation
The pension or annuity amount is not fixed.
https://www.youtube.com/watch?v=ARe0Eqd6XMk&t=25s
Please note that NPS is NOT a Guaranteed Pension Plan. The amount of pension will depend on various factors like Fund performance, your amount of contribution, the amount you have chosen for annuity and annuity option you have chosen.
NPS Annuity Service Providers
Following are the PFRDA – registered ASPs ( Annuity Service Provider) –
- Life Insurance Corporation of India (LIC)
- SBI Life Insurance
- ICICI Prudential Life Insurance
- Bajaj Allianz Life Insurance
- Star Union Dai-ichi Life Insurance
- Reliance Life Insurance
- HDFC Standard Life Insurance
NPS Fund Performance 2019
NPS Tier 1 C class
For NPS return lastest update, you can follow the below mentioned link
http://www.npstrust.org.in/return-of-nps-scheme
NPS Vs Equity Mutual Fund
To understand the complete difference between NPS and Equity Mutual Fund please watch our video available on YouTube.
Want to understand NPS – Here are the links
