National Pension Scheme: Everything you should know

Created on 09 Mar 2020

Wraps up in 6 Min

Read by 4.5k people

Updated on 30 Nov 2023

Old couple went bank to know about National Pension Scheme

More than half of the population have a brief plan as to what they will be doing in the near future. It may not necessarily be a clear one but a vague picture of what you might be doing 5 years from now or 10 years from now. The entire blueprint as to which college or school your child will go, which house to buy, which car to purchase, etc. would be set inside your mind.

But one thing most of us fail to include in this equation is our retirement. With inflation set on full speed, life can be dismal without a proper plan as to how you are going to cope up after retirement.

A study on retirement, which was conducted in India showed some interesting facts which might leave you startled. More than 76% of us intend to lead a peaceful life after we retire. But, hardly 10% people take the initiative to incline our financial goals towards it. Above 68% claim their children as their only hope in their old age. It is never late to do the right thing. Irrespective of the age category you fall under, it is high time you start thinking about it and set your retirement goals on the right track. 

A national pension scheme is one of the many vehicles which will help you to reach your financial goals. Now let us walk through all the essential details about the National Pension Scheme. 

Details of the National Pension Scheme

The National Pension Scheme was first launched in January 2004, as a compulsory investment scheme for all central government and state government employees.  However, it was made optional for government employees who joined office before 2004. NPS was made available to all private employees from 2009 onwards. It was floated by Pension Fund Regulatory and Development Authority (PFRDA) in a view to advising people to keep a portion of their income allocated towards savings, specifically for retirement. Government Employees are signed into this scheme by default as soon as they join the office. For a non-government employee, it is optional.

In most cases, the company itself comes forward to help employees open an NPS account. If they don't do so, you can open one for yourself. The only condition is that you have to be between 18 - 60 years old. 

There are two types of accounts:

  • Tier 1 account This is a mandatory account for government employees. Nearly 10% of your basic salary + daily allowances is invested into it. The government contributes to it as well. For non-government employees, you will be required to open an account with a minimum of ₹500 and invest a sum of ₹1000 annually. This is the minimum amount you will be required to hold annually. The maximum limit depends on you. In some private sector and corporate institutions, the employees are given an option to choose between NPS or EPF. If you opt for NPS, about 10% of your salary + daily allowances along with your employer’s contribution goes into it. 

  • Tier 2 account – This account is a voluntary account which can be opted only by non-government employees. It is also known as non-retirement NPS account. A unique feature of this account is that it allows you to withdraw the amount as and when you need it whereas the Tier-1 account has certain restrictions placed when it comes to withdrawal of invested money. In tier 2 accounts, neither the Government nor the employers make any sort of investment. To open an account, you will need a minimum balance of ₹1000. After that, you can start investing money, starting from a minimum of ₹250. You can invest whenever you want to. But the investments can begin only from ₹250 onwards. Tier 2 account holders do not get any tax exemptions.

How to invest in the National Pension Scheme?

A few fund managers who deal with NPS policies include the following, 

  • HDFC Pension Fund 

  • Birla Sun Life Pension Scheme

  • ICICI Prudential Fund Scheme

  • LIC Pension Fund Scheme

  • Kotak Pension Fund

  • National Pension Scheme

  • UTI Retirement Solution

  • Reliance Capital Pension Fund Scheme 

NPS invests in three venues. They are equity, corporate debt and government securities. And the matrix is somewhat like this:


High risk, High returns

Corporate debt 

Moderate risk, Moderate returns

Government securities 

Low risk, Low returns

So, the returns may range from around 4% to even 20%.

Besides, you are provided with the liberty to pick the status. It can be active, default or auto.

Active allocates nearly 50% of the amount in equity. On the other hand, Auto allocates funds depending on your age. If you are 35 years or below, then you get a fund allocation where 50 % of your money is put in equity, 30% in corporate debt and remaining in government bonds.

As your age increases, the allocation from equity is reduced, and the allocation towards government bonds is increased. The third option, which is the default option, allocates 55% in government securities. It allocates about 40% in corporate securities, 15% in equities and the remaining 5% in the money market. The equity investment under all three options mostly involves investment in index-based stocks. This is done to reduce the risk. 

Opening an NPS account is extremely easy. You can approach any nearby post offices or PSU banks in order to get assistance for opening an NPS investment account. A few private banks also offer this service. You will be required to furnish your ID proof and fill in the KYC form. 

Explore the NPS tax benefits

Tax Benefit available to Individual:

  • Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling of ₹1.5 lakh under Sec 80 CCE.
  • Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)
  • An additional deduction for investment up to ₹50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of ₹1.5 lakh available under section 80C of Income Tax Act. 1961.

Tax Benefits under the Corporate Sector:

Corporate Subscriber: Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, upto ₹7.5 Lakh.

Corporates: Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

Withdrawal and Exit Options

Sometimes we might require cash to meet certain unexpected expenses. It might be a sudden accident, your child's wish to do his or her higher studies abroad or a hospital expense. In such a case your pension might be the best rescue option you can rely upon. You are permitted to withdraw under both the tiers. But under Tier-1 you can make withdrawals only at the end of 10th year. That is your money will have to be locked up for a minimum period of 10 years. However, you can withdraw only 25% of the capital. The rest can be withdrawn at a gap of every five years.  

If you retire before you reach 60 years of age, then you are required to purchase an annuity with 80% of the money and the remaining amount reaches your hand only after it is taxed as per the income slab. If you retire at 60, then 60% of the money can be withdrawn. But taxes are to be paid only for 20% of it.  And with the remaining 40%, you are mandated to buy an annuity. On the event of the death of the policyholder, the entire amount is transferred to the nominee.

The Bottom Line

A compulsory investment towards annuity might be a drawback. Because in the recent scenario a lot of annuities are not performing up to the mark. But on the whole, the scheme looks to be a sound one for a common employee. It helps you to save periodically and fetches some attractive returns as well. Invest wisely!

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