National Pension Scheme or NPS – All you need to know

Government has appointed PFRDA to monitor pension funds in India. Amount invested by you along with other subscriber’s fund will be managed by PFRDA.

With PFRDA, registered pension fund managers such as ICICI Prudential, HDFC, Kotak Mahindra, DSP BlackRock pension funds are available.

While applying for NPS, you have the option to choose the name of the pension fund manager.

As per the approved investment guidelines of PFRDA, your contributions to national pension scheme account will be invested by any of these regulated professional fund managers based on your choice selected in the application form.

Who can join NPS

To provide old age security to indians, government has launched National Pension Scheme or NPS in the year 2004.

Initially NPS was launched for government employees, but later in the year 2009, it’s extended to all citizens.

Therefore, from 2009, all citizens of India are allowed to join National pension scheme or NPS.

This scheme has no restriction on the residential status of subscribers. Both resident and non-resident Indians can join the scheme if they are in the age group of 18 to 65 years.

You cannot have more than one NPS account opened in your name. However, you can invest in Atal Pension Yojana in addition to investing in NPS.

HUF is not allowed to join NPS.

Where to open a NPS Account

You can open a NPS account with any point of presence (POP) across india. Most of the banks, financial institutions and other entities including department of posts are appointed as Point Of Presence (POP). You can find the list through this link. These POPs will be responsible for receiving and processing subscribers request.

After registration, you will be getting a permanent retirement account number (PRAN). PRAN is issued to every subscriber. Its a card with 12 digit unique number remains with the applicant throughout his lifetime.

Type of account in NPS

National saving scheme offers two type of accounts:

  • Tier I – Non-withdrawable Pension Account
  • Tier II – Saving/investment Account

Tier I is a mandatory account. You have to open this account in order to join NPS scheme. Contribution to NPS account is allowed as tax deduction under section 80CCD of income tax act, 1961. You have withdrawal restrictions in it.

Tier II is a voluntary account, also know as investment account. If you want to open this account, then you can open it at the time of joining NPS or else at a later date.

Applicant has to open Tier II in addition to Tier I.

This means, subscriber cannot apply only for Tier – II NPS account.

Applicant has flexibility of withdrawing total amount of corpus out of Tier II account at any point of time. Contribution to Tier II is not allowed as tax deduction under section 80CCD.

Minimum amount to be invested in NPS

A minimum amount of Rs 500 and Rs 1000 has to be contributed to Tier I and Tier II account respectively. If you don’t invest the minimum amount then the account will be automatically frozen.

Here is a table showing restrictions on minimum balance and investment requirements in NPS account.

ParticularsTier ITier II
Minimum Contribution at the time of account openingRs 500Rs 1000
Minimum amount per contributionRs 500Rs 250
Minimum amount balance at the end of financial yearRs 6000Rs 2000
Minimum no. of contributions1 Per Year1 Per Year

How to choose investment option in NPS

In national pension scheme, you have the option of choosing the way your contributed money will be invested. You have two options, active choice or auto choice.

In active choice, investors will decide how the money should be invested in different asset classes and the percentage of that.

However, in auto choice, money will be invested automatically based on subscriber’s age.

Subscriber can have different Investment choice (Auto / Active) for both Tier I and Tier II account.

Subscriber can change the asset mix and investment choice once in a financial year for both Tier I and Tier II account.

Contribution to NPS can be done through cash, cheque, demand draft or any other mode at the chosen POP. Section 80CCD deduction on contribution to Tier I account will be available to subscribers irrespective of mode of payment.

Active Choice

In active choice option subscribers have option to invest in equity up to a maximum limit of 75%.

Based on his/her age, 2.5% exposure to equity will be reduced for every year of completion, up to a maximum limit of 50% when you attend the age of 60.

As discussed above, when you select this investment option, you have flexibility to define your own asset mix under following heads restricting to the maximum limit set for equity.

  • Asset Class E – stock or equity based on your age
  • Asset Class C – corporate bonds
  • Asset class G – government securities
  • Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc.

The total allocation across E, C, G and A asset classes must be equal to 100%.

Maximum equity (asset class E) allocation matrix for Active Choice.

Age (Years)Maximum Equity Allocation
Up to 5075%
60 and above50%

If you have not filled up the proportions of asset class after selecting active choice, then by default your contributions will be invested in “LC 50 – Moderate Life Cycle Fund”.

Auto choice

Auto choice is the default plan, which is also known as lifecycle fund.

This means if a subscriber does not choose any option, then automatically subscribers money will be invested as per the “LC 50 – Moderate Life Cycle Fund” under “Auto choice” option.

In auto choice option, investment will be made in proportion of funds invested across following four classes up to the maximum limit specified :

Investment ClassMaximum percentage of contribution allowed to invest out of the total fund
Equity – E75%
Corporate Bonds – C100%
Government Bonds – G100%

Under this option, proportion of funds invested across asset class is determined by a predefined portfolio.

In it, proportion of investment in class E decreases and class C & class G increases with the age of the subscriber.

The scheme is further divided into following heads;

  • Aggressive (LC75) – High Risk, High Return (Equity exposure up to 75%)
  • Moderate (LC50) – Medium Return, Medium risk (Equity exposure up to 50%)
  • Conservative (LC25) – Low Risk, Low Return (Equity exposure up to 25%)

As the name suggest, in aggressive plan, your contribution will have more exposure to equity and less into corporate bonds or government deposits. For instance, exposure to equity in aggressive option starts with 75% of the total assets till the age of 35 and then gradually reduces as per the age of the subscriber.

Under auto choice, investment is automatically done based on the age of the assessee and the asset class you have chosen.

Similarly, for moderate scheme your exposure to equity will be reduced in comparison to aggressive scheme based on your age. In it, exposure to equity investment starts with 50% of the total assets till the age of 35 and gradually reduces as per the age of subscriber. This is the default choice if the subscriber does not choose one at the time of application or thereafter.

In case of conservative scheme, the equity exposure is reduced substantially based on age and investment into corporate bonds and government securities increases. Exposure to equity starts with 25% of the total assets till age 35 and gradually reduces as per the age of the subscriber.

You have option to change your plan, scheme and fund manager once in a year. You can even change your investment option from active to auto or vise versa.

You have to be very careful while choosing the investment option. In case you have opted for Auto Choice and fill up section asset allocation section of active choice, the Asset Allocation instructions will be ignored and investment will be made as per moderate auto choice option (LC 50).

Here is how investment mix is defined for auto choice option.

LC 75 – Aggressive Life Cycle Fund

Age of the contributorPercentage in Asset Class EPercentage in Asset Class CPercentage in Asset Class G
Up to 35 years751015
36 years711118
37 years671221
38 years631324
39 years591427
40 years551530
41 years511633
42 years471736
43 years431839
44 years391942
45 years352045
46 years322048
47 years292051
48 years262054
49 years232057
50 years202060
51 years191863
52 years181666
53 years171469
54 years161272
55 years & above151075

LC 50 – Moderate Life Cycle Fund

Age of the contributorPercentage in Asset Class EPercentage in Asset Class CPercentage in Asset Class G
Up to 35 years503020
36 years482923
37 years462826
38 years442729
39 years422632
40 years402535
41 years382438
42 years362341
43 years342244
44 years322147
45 years302050
46 years281953
47 years261856
48 years241759
49 years221662
50 years201565
51 years181468
52 years161371
53 years141274
54 years121177
55 years & above101080

LC 25 – Conservative Life Cycle Fund

Age of the contributorPercentage in Asset Class EPercentage in Asset Class CPercentage in Asset Class G
Up to 35 years254530
36 years244333
37 years234136
38 years223939
39 years213742
40 years203545
41 years193348
42 years183151
43 years172954
44 years162757
45 years152560
46 years142363
47 years132166
48 years121969
49 years111772
50 years101575
51 years91378
52 years81181
53 years7984
54 years6787
55 years & above5590

Can you exit from NPS

Yes, you can exit from national pension scheme after 10 years of account opening or at the age of 60, whichever is early.

If you exit NPS before the age of 60 years, then only up to 20% of the corpus can be withdrawn. Balance has to be invested in annuity plan. When the corpus is less than or equal to Rs 1,00,000, you can withdraw the whole amount from NPS, investing into annuity plan doesn’t required.

If you exit at the age of 60, then up to 60% of the corpus can be withdrawn and balance has to be invested in annuity. When your corpus in NPS is less than equal to Rs 2,00,000, you can withdraw the whole amount without investing into annuity plan.

However, subscriber to NPS has following flexibility of withdrawal at the age of 60:

  • Can defer the decision to invest in annuity for 3 years.
  • Can defer the decision of lump sum withdrawal for 10 years.
  • Can be withdrawn in 10 installments.
  • Can contribute till the age of 70 years if you don’t want to exit at the age of 60.

Subscriber can also use 100% of accumulated wealth to buy annuity plan.

Upon the death of the subscriber, entire accumulated amount available in his/her NPS account will be paid to legal heir. In this case the legal heir is not required to purchase any annuity plan.

You can withdraw the whole money from the Tier II account at any point of time. In Tier I account, you have restrictions.

Partial withdrawal from NPS account

There is no limit on withdrawal from Tier II account. You can withdraw any amount anytime from Tier II account based on your requirements.

In case of Tier I account, before attainment of 60 years, 25% of the contribution amount is allowed upto a limit of 3 for specific purpose like child marriage, higher education, treatment of critical illness, buying a home etc. Eligibility will arise after 3 years of NPS account opening.

Out of the 3 eligible withdrawal limit, 2nd and 3rd withdrawal can be done after a gap of 5 Years after the first withdrawal.

Tax deduction on contribution to NPS

Subscriber can claim tax deduction under section 80CCD(1) up to a maximum limit of Rs 1,50,000 for their contribution to NPS scheme.

Additional deduction is also available under section 80CCD(1B) up to a maximum limit of Rs 50,000 in addition to above deduction.

If you are a salaried individual and your employer has contributed to the NPS account for you, then tax deduction can be claimed up to the limit of 10% on salary under section 80CCD(2) in addition to above two deductions.

Tax exemption at the time of withdrawal from NPS account

National Pension scheme is not falling under EEE category, its EET. This means contribution to this fund is exempt, income accumulated throughout the period of your investment is also exempt, at the time of withdrawal is taxable.

As per section 10(12A), if you are withdrawing from NPS at the age of 60 or after that, then 40% of the total corpus is exempted. If your withdrawal is within this limit then total amount will be exempted. If withdrawal amount is more than the limit of 40%, then the difference percentage will be charged to tax. Rest of the amount invested in annuity plan will be exempted.

However, income received from annuity plan after investing in it is not exempted. Its taxable in your hand in the year of receipt.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.