The National Pension System (NPS) started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009.

Low-cost structure, tax efficiency and flexibility of investment have made the National Pension System a popular financial tool to facilitate a regular income post-retirement to all the subscribers. The NPS offers two types of accounts – Tier I and Tier II

Until an individual turns 60, the money in the account is locked in. It means one can withdraw the accumulated corpus once he turns 60. He can withdraw 60% of the corpus as a lump sum (tax-free), while the remaining 40% is used to buy annuities for securing income in the form of a pension. In Tier I account, contributions made qualify for tax benefit under several sections of the Income Tax Act, 1961. While Tire II doesn’t qualify for any tax benefit.

It is based on a unique Permanent Retirement Account Number (PRAN), which is allotted to every subscriber.

Salient Features & Benefits:

  • NPS is regulated by PFRDA (Pension Fund Regulatory and Development Authority & is under Ministry of Finance, Govt. of India).
  • Indian citizens can invest in NPS voluntarily & there is flexibility in selection/ change investment pattern and fund manager. This ensures that one can optimize returns as per his comfort with various asset classes (Equity, Corporate Bonds, Government Securities and Alternate Assets) and fund managers.
  • NPS is one of the lowest-cost investment products available & every subscriber of NPS gets PRAN which remains identical irrespective of change in employment, city or state.
  • NPS account holders can transfer their Superannuation funds to their NPS account without any tax implication. (Post approval from relevant authorities)
  • One must contribute to NPS until the age of 60 years. While it is mandatory for employees of Central Government, for other individuals it is voluntary.
  • Investment under Tier 1 is eligible for income tax deduction; one must contribute a minimum of INR 6,000 per annum or INR 500 per month. However, Investment under Tier 2 is not eligible for income tax deduction; one must contribute a minimum of INR 2,000 per annum or INR 250 per month to maintain investment under Tier 2.

Note: Funds from Tier II can be transferred to Tier I

Funds from Tier I cannot be transferred to Tier II.

  • There is an option to choose from various investment options like Equity funds, Government bonds, Government securities, etc.
  • In case the assessee dies, and the nominee decides to close the NPS account, then the amount received by the nominee is exempt from taxation
  • A partial withdrawal of up to 25% of the contribution made by an individual, subject to certain conditions, is exempt from taxation.
  • If the assessee is an employee and decides to close the NPS account or opt out of NPS, then only 40% of the total amount is tax-exempt.
  • The assessee can withdraw 60% of the entire amount to reach 60 years as tax-free income. The remaining 40% is also tax-free if used to purchase an annuity plan to ensures a monthly income in the form of a pension.

Tax Benefits under Income Tax Act,1961

  • U/S 80CCD(1): States about the contribution made by Salaried Employees or Self Employed Person
    • Salaried individuals may invest up to 10% of salary (Basic salary + DA).
    • Self-employed Individuals may invest up to 20% of GTI (Gross Total Income).

However, the contribution is allowed as a deduction but the same is capped up to INR 1,50,000 under section 80C of Income Tax Act, 1961.

  • U/S 80CCD(1B): States about additional deduction other than Section 80CCD(1)

Assessee can claim deduction up to INR 50,000. This benefit is over and above the limit of INR 1,50,000 under section 80C of The Income Tax Act, 1961.

  • U/S 80CCD(2): States about the contribution made by Central Govt. or Other than Central Govt.

The entire employer’s contribution is allowed as a deduction in the computation of total income. However, the same has capped up to INR 7.5 lakhs for NPS, PF & Superannuation. Finance Act 2020 has amended Section 17, under which aggregate of employer’s contribution towards provident fund, superannuation fund and pension fund over INR 7.5 Lakhs is taxable as perquisites.

  • 14% of salary, where the contribution is done by Govt. employer
  • 10% of salary (basic salary + DA), where the contribution is done by other than Govt. employer.

NOTE: If a person opts for New Tax Regime he has to forgo the deductions u/c VI-A like 80C, 80D, 80E, 80G except 80CCD(2). This means they can claim deduction u/s 80CCD(2) irrespective of the fact that whether they are choosing an old tax regime or a new tax regime.

Investment Option

An individual has the option to select a fund allocation pattern for their investment across various asset classes vide exercising (i) Active Choice (ii) Auto Choice.

Active Choice: This option allows one the freedom to design the portfolio by voluntarily distributing investments among 4 asset classes as below:

  • Equity (E): This is a ‘High risk – High Return’ option as the funds are invested in equity Subscriber can choose to invest up to 75% in this asset class.
  • Corporate Bonds (C): Funds are invested in fixed income-bearing debt instruments.
  • Government Securities (G): Funds are invested in Government Securities.
  • Alternate Assets (A): Funds are invested in real estate and infrastructure funds. Maximum capping is a 5% investment since this is an extremely risky investment.

Auto Choice: The auto choice is when the allocation of one’s corpus towards equity and debt changes according to the individual’s age automatically according to the levels set by the government. There are three modes in auto choice: Aggressive, Moderate & Conservative.

Corporate Benefits

Pension Fund Regulatory and Development Authority of India (PFRDA) has introduced ‘The Corporate NPS’ model to enable corporates to offer NPS investment benefits to all employees. This offer is within the purview of their employer-employee relationship.

Corporate Benefits

  • Corporates do not bear any administrative or fund management charge/ minimal charges while offering NPS to employees
  • Trust formation is not required for NPS setup in the company.
  • Employees can be added and removed from the NPS scheme with a simple process.
  • As an employer, there is the option to decide the NPS for their employees, like percentage contribution, duration of opt-in/opt-out, etc. Employers may also choose to offer NPS as a voluntary scheme to all employees or a select group of employees.
  • NPS is voluntary for the private sector and can be run concurrently with any other retirement benefit program implemented by the corporate.

Entities Involved In NPS

The regulator has appointed multiple agencies for different NPS services to ensure better transparency and efficiency.

Pension Fund Regulatory and Development Authority (PFRDA):

PFRDA is a regulator for NPS which was set up by the Government of India on August 23, 2003. PFRDA promotes old age income security by establishing, developing and regulating pension funds and protects the interests of subscribers in schemes of pension funds and related matters.

National Pension System (NPS) Trust:

This is the Trust body formed for NPS. It is responsible for taking care of the funds under NPS by prudently monitoring / auditing the portfolio of the Pension Fund Manager on regular basis to ensure subscriber interests.

 Central Recordkeeping Agency (CRA):

The regulator PFRDA has appointed K-Fin Technology Private Ltd & NSDL e-Governance Infrastructure Limited to maintain data and records of NPS subscribers. They are responsible for recordkeeping, administration and customer service functions for all subscribers of NPS.

Points of Presence Service Providers (POP SPs):

The initial processes of NPS shall be carried out through the entities known as Points of Presence (POPs) appointed by the PFRDA. POPs shall provide the services under NPS through their network of branches called POP Service Providers (POP-SP).

Pension Fund Manager (PFMs):

There are limited pension fund managers in the country that manage NPS accounts and are governed by regulatory guidelines. An individual has the option to choose any one out of all PFMs.

Annuity Service Providers (ASPs):

After completion of 60 years of age, individuals will have the option to select Annuity Plans offered by Annuity Service Providers.

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    1. Pratyush Parashar says:

      Thank you for your query….
      Atal Pension Yojana and NPS both are different pension schemes introduced by central government to get regular pension on attainment of age of 60. An individual assessee can claim deductions on the contributions made towards both of the schemes i.e. NPS or Atal Pension Yojana under Section 80CCD(1)

    1. Pratyush Parashar says:

      Thank You for your remarks, it has been further clarified as:
      A Subscriber is required to make initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
      Subsequently, a Subscriber can make contribution subject to the following conditions:
      Tier I:
      Minimum amount per contribution – Rs. 500
      Minimum contribution per Financial Year – Rs. 1,000
      Over and above the mandated limit of a minimum of one contribution in Tier I, a Subscriber may decide on the frequency of the contributions across the year as per his / her convenience.
      Tier II:
      Minimum amount per contribution – Rs. 250, although to make contribution each year is not mandatory & even to keep minimum balance is also not required.

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September 2021