National Pension Scheme (NPS)

National Pension Scheme (NPS) was launched in 2004 as a government-sponsored pension scheme. It was brought into action by the Pension Fund Regulatory and Development Authority of India (PFRDAI). Initially, the scheme was launched to cover only the government sector employees, but eventually, in 2009, the scheme opened up to cover all sections of the society.

NPS Scheme was primarily designed to secure the future of individuals in terms of financial stability, after their retirement. Under this scheme, subscribers are required to contribute continuously during their work tenure to avail the benefit of regular annuity payments after retirement.

What is the National Pension Scheme?

Every individual wants to lead his/her post-retirement life with minimum to no hassle. Taking care of investment corpus for post-retirement expenditures is a vital part of financial planning. This helps in developing habits of financial discipline in individuals because people get into the habit of saving some part of their income regularly for their greater good. To provide the facility of pension payments to individuals who contribute a specified amount of money to the national pension scheme throughout their working age, the government of India launched the national pension scheme in India.

All employees from the public sector, private sector, and even the unorganised sector, excluding those working in the armed forces are eligible for the national pension scheme. The minimum subscription under this scheme starts from a yearly contribution of Rs. 1,000. Subscribers to this scheme can choose to pay this amount either as a lump sum or as a monthly instalment. This subscribed amount is invested in market-linked instruments such as equity and debt; therefore, the rate of NPS returns depends on these instruments’ performance.

Why Should One Invest in National Pension Scheme?

Here is a rundown of the key reasons to invest in the National Pension Scheme (NPS):

  • Assured Pension

    After retirement, the earning potential of an individual becomes nil, but the expenses still persist. These expenses are sometimes even higher when compared to the expenses incurred during working years, probably because of inflation and a rise in medical necessities.

    An option that continues to pay a pension to the spouse of a subscriber in the event of his/her death: In the event of the death of a pension holder, the NPS scheme provides an option to pay the requisite pension amount to his/her spouse to fulfil family obligations.

  • Risk Reduction

    Investment in NPS is a goal that one sets for oneself that will be obligated during one’s retirement period. National Pension Scheme provides subscribers with an automated risk reduction strategy where one can choose the equity-debt mix depending on his/her risk-taking appetite.

  • No Major Commitments for Investing

    A subscriber can choose when to invest and how much to invest in NPS. The minimum requirement is only Rs. 1000 per year.

Features and Benefits of National Pension Scheme

Beyond these reasons, there are many other benefits and features that one must consider while deciding to invest in the National Pension Scheme.

Salient Features of National Pension Scheme

Some of the salient features of NPS India that will help one decide the pros and cons of this scheme are:

  • A proportion of funds invested under the National Pension Scheme is invested in equities
  • In the event when the subscriber is not happy with the performance of his/her funds, there is an option to change the fund manager
  • The returns under the National Pension Scheme are higher than traditional tax-saving instruments such as Public Provident Fund (PPF)
  • According to section 80C of the IT Act, an individual can claim a deduction up to a maximum of Rs. 1,50,000 for the sum invested under National Pension Scheme India. *Tax benefit is subject to changes in tax laws.
  • After retirement, one cannot withdraw the entire investment corpus from the NPS account. He/she can withdraw only up to 60% of the investment, and the rest 40% is utilised towards regular pension payments
  • An NPS account can be opened either online/offline
  • After an NPS account has been activated for a period of 3 consecutive years, one can withdraw up to 25% of the accumulated fund for specific purposes, which include marriage, higher education, medical contingencies, purchasing a house, etc.

Core Benefits of National Pension Scheme

Here are some of the National Pension Scheme (NPS) benefits that every investor must take note of:

  • Tax Benefits

    NPS tax benefit is available to the individuals who subscribe to this scheme. Under this scheme, the contribution made by both employer and employee is eligible for tax exemptions. According to the provisions of the Income Tax Act, 1961, an individual can claim deduction up to a maximum of Rs. 1.5 Lakh under section 80C. *Tax benefit is subject to changes in tax laws.

  • Rate of Return

    Under the National Pension Scheme, a proportion of the investment is invested in the equities by the fund manager. These equity investments offer a higher rate of interest than the traditional tax-saving instruments. So, this scheme is suitable for individuals who wish to attain financial security after their retirement.

  • Pre-mature Withdrawals and Exit Policies

    Under the National Pension Scheme, it is compulsory to contribute until the individual (subscriber) has attained the age of 60 years. Partial withdrawals apply after 3 consecutive years from the opening date of the NPS account. Such withdrawals are allowed only for specific purposes such as marriage, higher education, buying a house, medical necessities, etc. The subscriber can withdraw 25% of the accumulated investment amount for the purposes mentioned above.

  • Equity Allocation Rules

    Under NPS, there are two choices for the allocation of the investment amount. One is an auto choice, and the other is an active choice. In case the subscriber opts for auto choice, his/her funds will be allocated in different schemes depending on his/her profile and age. On the other hand, if one opts for active choice, he/she gets to choose the proportion of funds to be allocated under equity and other schemes.

  • Voluntary Investments

    The subscriber gets to choose the time he/she wants to invest during a financial year. One can also change the amount of investment at one’s own discretion.

  • Flexibility

    Investment under the National Pension Scheme offers flexibility since it provides the subscriber with an option to choose where his/her funds will be invested and in what proportion.

  • Regulated Scheme

    NPS is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA), so it is a reliable scheme to invest in.

Best NPS Plans 2021

The following are the best National Pension Scheme plans for 2021:

Scheme Name

Net Asset Value (NAV)

Returns in % (percentage)

Tier I Birla Sun Life Pension Scheme

13.4536

17.20

10.37

-

Tier II Birla Sunlife Pension Scheme

12.9253

16.38

8.88

-

Tier I HDFC Pension Fund

20.1810

17.80

10.53

10.47

Tier II HDFC Pension Fund

20.4761

16.93

10.31

10.30

Tier I ICICI Prudential Pension Fund Scheme

27.0555

17.17

10.38

10.40

Tier II ICICI Prudential Pension Fund Scheme

25.8713

16.90

10.31

10.34

Tier I Kotak Pension Fund

26.9363

17.37

10.39

10.58

Tier II Kotak Pension Fund

24.9800

16.33

9.95

10.19

Tier I LIC Pension Fund

21.7565

18.19

11.49

11.49

Tier II LIC Pension Fund

22.1161

18.20

12.06

11.73

Tier I SBI Pension Fund

29.2409

17.31

10.45

10.54

Tier II SBI Pension Fund

27.7627

16.71

10.18

10.34

Tier I UTI Retirement Solution

26.1936

17.12

9.87

10.04

Tier II UTI Retirement Solution

26.9028

16.77

10.05

10.14

*Paisawiki does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.

Types of NPS Plans in the National Pension Scheme India

There are two types of NPS accounts: Tier-I and Tier-II accounts. Here is a detailed list of distinctive features of the two accounts.

Features

Tier-I Account

Tier-II Account

Maximum Contribution

No ceiling on the amount of contribution

No ceiling on the amount of contribution

Minimum Contribution

Rs. 500 or Rs. 1000 contribution per annum is mandatory

Rs. 250 must be contributed towards the account

Allowed Withdrawals

Contributors cannot withdraw their investments until a specified period has elapsed since the date of opening of the account

Subscribers are allowed to withdraw their contributions towards Tier-II accounts

Status

Tier-I account is mandatory for individuals who wish to opt for NPS Scheme

Tier-II accounts are voluntary and can be opened at the discretion of the subscribers.

Types of Investments under the NPS Scheme

Class of Fund

Invested In

Risk Average

Return since launch (%)

E

Index-based stocks

Like any other large-cap equity funds, these carry market risks.

3.79%

C

Bonds issued by the public sector units (PSUs), state governments and private firms

The risk is lower as compared to index-based stocks however risk depends on the quality of companies

8.66%

G

Bonds issued by the central government

Lacks default risk but the volatility of these bonds cannot be avoided in the long term

5.92%

What is Not Covered in the NPS Plans?

National Pension Scheme does not allow the flexibility of quitting investments before retirement. If an individual wish to discontinue contributions at any point before the age of retirement, he/she will not be eligible for pension payments.

Under Tier-I NPS accounts, subscribers are not allowed to withdraw their investment corpus, subject to a few conditions.

Tax Benefits of NPS Plans

One can claim tax exemptions under section 80C of the Income Tax Act.

  • Section 80CCD(1)

    This section covers self-contribution. For salaried employees, the maximum deduction available is 10% of the salary income. In the case of self-employed individuals, this limit is 20% of the gross income.

  • Section 80CCD(2)

    This section covers the exemption available for the contribution by an employer. This deduction is not available to self-employed taxpayers. The amount of deduction is the minimum of:

    • Gross total income
    • 10% of the basic salary, including dearness allowances
    • The actual contribution made by the employer

*Tax benefit is subject to changes in tax laws.

Steps to buying National Pension Scheme Online

To open an NPS account online, it is important to link the account to PAN, mobile and Aadhaar number. Here is a list of steps to follow to open an online NPS account:

Step 1: Visit the official website of NPS.

Step 2: There are two options to choose from ‘corporate subscriber’ and ‘individual subscriber’.

Step 3: The next step is to choose the residential status, i.e. 'India Citizens' and 'NRI'

Step 4: Tier I account is mandatory. One can opt for either a tier-I account or both tier-I and tier-II accounts.

Step 5: The next step is to enter the PAN details and choose a suitable POP and bank.

Step 6: Click on ‘registration’ and choose ‘register with Aadhar’.

Step 7: Enter your Aadhaar number and generate a one-time password (OTP).

Step 8: The registrant will get the OTP on his/her registered number.

Step 9: The next step is to add personal details, OTP, nomination details and bank details.

Step 10: After this, the PRAN - Permanent Retirement Allotment Number will be allotted.

Step 11: The individual is then required to submit an e-signature and photograph after which OTP will be sent to the registered mobile number.

Step 12: Enter the OTP to verify the signature and make payment thereafter.

Step 13: Once directed to the payment gateway, make payment.

Step 14: After successful payment, the permanent retirement allotment number will be generated.

How to Compare different National Pension Scheme Plans?

Besides the NPS scheme, various other tax-saving investment instruments are available for investors. These include public provident fund (PPF), equity-linked savings scheme (ELSS), and tax-saving fixed deposits (FDs).

In ELSS, there is a lock-in period of 3 years which is 15 years for PPF and 5 years for FD. While PPF and FDs are risk-free, NPS and ELSS come with market-related risks.

An individual must choose a national pension scheme plan considering various factors such as rate of return, net asset value, etc.

National Pension Scheme in India

  • Birla Sun Life Pension Scheme

    Birla Sun Life Insurance Company Limited (BSLI) is one of the prominent international financial services company from Canada. They offer three types of pension plans to their customers, namely Birla Sun Life Insurance Empower Pension Plan, Empower Pension Plan SP, and Immediate Annuity Plan.

  • HDFC Pension Plan

    HDFC pension plan provides its subscriber with financial security when one's career ends. HDFC offers a variety of plans such as HDFC Life Pension Guaranteed Plan, New Immediate Annuity Plan, etc.

  • SBI Pension Plan

    SBI is one of the leading insurance providers in the nation. SBI offers a wide range of plans which are specifically designed to cater to the financial needs after the retirement of an individual. It offers a variety of plans such as SBI Life Saral Pension Plan, SBI Life Annuity Plus, and SBI Life Retire Smart.

*Paisawiki does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.

Plans with Lowest Premiums

One can choose amongst various plans depending upon the premium rate etc. from various service providers:

  • Birla Sun Life Pension Scheme Tier I
  • Birla Sunlife Pension Scheme Tier II
  • HDFC Pension Fund Tier I
  • HDFC Pension Fund Tier II
  • ICICI Prudential Pension Fund Scheme Tier I
  • ICICI Prudential Pension Fund Scheme Tier II
  • Kotak Pension Fund Tier I
  • Kotak Pension Fund Tier II
  • LIC Pension Fund Tier I
  • LIC Pension Fund Tier II
  • SBI Pension Fund Tier I
  • SBI Pension Fund Tier II
  • UTI Retirement Solution Tier I
  • UTI Retirement Solution Tier II

National Pension Scheme - FAQs 

Written By: Paisawiki - Updated: 26 March 2021
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Disclaimer: Paisawiki does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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