National Pension System (NPS)- Scheme Features

National Pension System (NPS) is a pension cum investment scheme promoted by the Government of India to ensure retirement income to its citizens. NPS was launched on January 1, 2004 with the main objective of providing old age security. NPS provides an attractive long term saving avenue to effectively plan the retirement through safe and regulated market-based return. The scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA).

What are the eligibility criteria to join National Pension System (NPS)?

Both resident and Non-resident individual Indian citizens can join NPS. On the date of submission of NPS application, the applicant should be in the age group of 18-65 years. However, multiple accounts in the same name are not envisaged. Similarly, NPS accounts must be opened in individual capacity only. Joint operation or joint accounts under NPS are not permitted. 

Those NRIs, joining the NPS must abide by the regulatory requirements prescribed both by RBI and FEMA from time to time.  Though NRIs are permitted to enroll for NPS, Overseas Citizens of India (OCI) and Person of Indian Origin (PIO) and HUFs are not eligible for opening of NPS account. 

What is the process to open a National Pension System (NPS) account?

To open a National Pension System (NPS) account, the applicant should visit a Point of Presence (PoP) service provider, with address proof and identity proof. Points of Presence (POPs) are appointed by the PFRDA. Almost all nationalized and private sector banks have been approved as POPs. POPs provide the services under NPS through their network of branches called POP Service Providers (POP-SP). Hence, all activities related to NPS can be carried out through the branches/ authorized branches of the banks in India. Enrolment/ remittance can be carried out through online too.

What is Permanent Retirement Account Number (PRAN)?

National securities depository Limited (NSDL) is appointed as the Central Recordkeeping Agency (CRA) of NPS. Permanent Retirement Account Number (PRAN) is unique number allotted to a subscriber to NPS. It remains the same throughout the life of the subscriber. On successful submission of documents, the PRAN is conveyed by NSDL-CRA to the registered e-mail and mobile number of subscriber. PRAN can be used for future transactions from anywhere in India. PRAN can also be used to access  two personal accounts associated with the NPS. 

What are the two accounts associated with NPS?

Two accounts known as Tier I and Tier II are linked to each NPS account. Tier I account is a non-withdrawable account meant for forming the corpus for retirement. Tier II account is a voluntary saving facility. The balance in this account can be withdrawn by the subscriber as and when required. 

Tier I account is mandatory under NPS whereas Tier II account is optional. The income tax benefit under Section 80 CCD of IT Act,1961 is eligible only for the contributions made to Tier I account. There is no tax benefits on the remittance to Tier II. At the same time withdrawals from Tier II accounts are subjected to capital gain. 

How does National Pension System (NPS) work? 

Subscriber must contribute periodically and regularly towards NPS- Tier I account. This contribution is towards creating the corpus for retirement and hence the contributions must be made during the working life. The subscriber will have the option to select fund managers from the approved list. Also option can be given for investment of up to 75% contribution in equities. This option is linked to the age of the subscriber.  

On retirement or exit from the scheme, the corpus can be availed by the subscriber. However, only a portion of this corpus can be withdrawn by the subscriber and the balance amount will have to be utilized for purchase of annuity to provide a monthly pension post retirement.  On exit from the fund at the time of superannuation, at least 40% of corpus funds must be utilized for purchase of annuity and balance amount can be withdrawn. If the total corpus is less than or equal to Rupees two lakhs, full amount can be withdrawn. 

If the exit is before the age of 60/ superannuation, then 80% of fund must be utilized for purchase of annuity. This exit option is available only after completion of 10 years. In case of the death of subscriber, 100% of corpus would be handed over to the nominee/ legal heir. 

What are the advantages associated with National Pension System (NPS)? 

NPS offers the following advantages compared to other pension products available in the market. 
i. Low cost product
ii. Additional tax benefits for individuals, employees and employers (Eligible for additional tax
benefit of Rs 50,000/-  under section 80 CCD over and above Sec 80C limit of Rs 1,50,000/-)
iii. Favorable market linked returns (Historically delivered 14% CAGR)
iv. Corpus is handled by professional pension funds
v. Pension funds are regulated by PFRDA, the regulator of pension funds in India,  set up through an act of Parliament.