What is National Pension Scheme: Tax Benefits, Eligibility, Returns & Interest Rate

National Pension Scheme (NPS) India is a voluntary and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. We have covered the following in this article.

Latest Update:

The Budget 2024-25 proposed for the introduction of NPS Vatsalya, where parents can open an NPS account for their minor children and contribute an amount every month or year untill they reach 18 years old. Once the children are 18 years old, they can manage the account independently by converting the NPS Vatsalya account into a normal NPS account.

The CBDT notifies Form 12BBA, a declaration form, to be submitted by the eligible senior citizens to the specified banks to take relief from filing the ITR.

What is National Pension Scheme?

The National Pension Scheme (NPS) is a social security initiative by the Central Government. This pension programme is open to employees from the public, private and even the unorganised sectors, except those from the armed forces.

The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement. 

Earlier, the NPS scheme covered only Central Government employees. Central Government employees joining on or after 01-01- 2004 are mandatorily covered under the NPS. Now, however, the PFRDA has made it open to all Indian citizens on a voluntary basis.

The NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

Who Should Invest in National Pension Scheme (NPS)?

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs.

A systematic investment like this can make a massive difference in your life post-retirement. In fact, salaried people who want to make the most of the 80C deductions can also consider this scheme.

National Pension Scheme Benefits  

Returns/Interest

A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF.

This scheme has been in effect for over a decade, and so far has delivered 9% to 12% annualised returns. In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.

Risk Assessment

Currently, there is a cap in the range of 50% to 75% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.

However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility.

The earning potential of NPS is higher as compared to other fixed-income schemes.

Regulated

The PFRDA regulates NPS with transparent investment norms, regular performance reviews, and monitoring of fund managers by NPS Trust.

Flexibility

The NPS subscription is flexible. NPS subscribers can contribute to the NPS fund at any time in a financial year and change the number of subscriptions. They can choose their own investment options. They can operate their account online from anywhere and continue it even when they change their city and employment. 

National Pension Scheme Tax Benefits

Employee Tax Benefits For Self-Contribution:

Employees who contribute to NPS can claim the following tax benefits on their contributions:

• Tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.

Employee Tax Benefits On Employer Contributions:

Employer's contribution towards NPS of an employee is eligible for a tax deduction of up to 10% of salary, i.e. basic plus DA, or 14% of salary if such contribution is made by the Central Government under Section 80CCD(2) beyond the Rs.1.5 lakh limit provided under Section 80CCE.

Note: As per the Budget 2024, the contribution allowed by employer's has been increased to 14% from 10% of the salary. This change will be effective from 1st April, 2025.

Tax Benefits For Self-employed People:

Self-employed individuals who contribute to NPS can claim the following tax benefits on their own contributions:

• Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.

Tax Benefits On Partial Withdrawal From NPS Account:

Partial withdrawals from NPS are eligible for tax exemption when the amount withdrawn is up to 25% of self-contribution, subject to the circumstances and criteria prescribed by PFRDA under section 10(12B).

Tax Benefit On Annuity Purchase:

Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).

Tax Advantages On Lump Sum Withdrawal:

Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.

Corporate/employer Tax Breaks:

A tax deduction is provided on the amount contributed to an employee's NPS account as an employer contribution, up to 10% of the employee's salary (Basic + DA) of the employer's contribution as a 'Business Cost' from the Profit & Loss Account under section 36(1)(iv)(a).

National Pension Scheme Withdrawal Rules After Retirement (60 years)

Presently, a person can withdraw up to 60% of the total corpus as a lump amount after retirement, with the remaining 40% going into an annuity plan. Subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh without purchasing an annuity plan under the new NPS guidelines. These withdrawals are also tax-free.

For example, if a person has a Rs 4.5 lakh corpus, they can withdraw the entire sum after retirement. However, if the corpus exceeds Rs 10 lakh, the tax-free withdrawal limit is Rs 6 lakh. For the remaining Rs 4 lakh, they must get an annuity plan. 

Although withdrawals are tax-free, an annuity is taxable based on the income bracket. As a result, if your annuity is worth Rs 4 lakh, it will be taxed at the individual's tax bracket rate. The payment is taxable in accordance with the years of payment.

Read the latest NPS rules change here.

National Pension Scheme Early Withdrawal Or Exit Rules

Upon Superannuation - When a subscriber reaches the age of Superannuation/reaches the age of 60, he or she must use at least 40% of the accrued pension corpus to purchase an annuity that provides a regular monthly pension. The remaining monies are available for withdrawal as a lump payment.

Subscribers can take a 100% lump sum withdrawal if their entire accrued pension corpus is less than or equivalent to Rs.5 lakh.

Pre-mature Exit - In the event of a premature exit (before reaching the age of superannuation/turning 60), at least 80% of the Subscriber's accrued pension corpus must be used to purchase an Annuity that provides a regular monthly income. If the total corpus is less than or equal to Rs.2.5 lakh, the subscriber can opt for 100% lumpsum withdrawal.

Upon the death of the subscriber - Following the subscriber's death, the entire accrued pension corpus (100%) would be paid to the subscriber's nominee/legal heir.

Equity Allocation Rules

The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50% of your investment to equities. There are two options to invest in – auto choice or active choice.

The auto choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide on the scheme and to split your investments.

Option to Change the Scheme or Fund Manager

With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance. This option is available for both tiers I and II accounts. 

National Pension Scheme Eligibility

Any person fulfilling the following eligibility criteria can join NPS:

• Should be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).
• Should be aged between 18 – 70 years.
• Should comply with the Know Your Customer (KYC) norms detailed in the application form.
• Should be legally competent to execute a contract as per the Indian Contract Act.
• Overseas citizen of India (OCI), Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
• NPS is an individual pension account, thus it cannot be opened on behalf of a third person.

How to Invest In National Pension Scheme (NPS)?

The Pension Fund Regulatory and Development Authority (PFRDA) regulates the operations of the NPS, and they offer both an online as well as an offline means to open this account.

Offline Process

To open an NPS account offline or manually, you will have to find a PoP – Point of Presence, (it could be a bank too) registered with the PFRDA. Collect a subscriber form from your nearest PoP and submit it along with the KYC papers. Ignore if you are already KYC-compliant with that bank. 

Once you make the initial investment (not less than Rs.500 or Rs.250 monthly or Rs. 1,000 annually), the PoP will send you a PRAN – Permanent Retirement Account Number.

This number and the password in your sealed welcome kit will help you operate your account. There is a one-time registration fee of Rs.125 for this process.

Online Process

It is now possible to open an NPS account in less than half an hour. Opening an account online (enps.nsdl.com) is easy, if you link your account to your PAN, Aadhaar and mobile number.

You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.

Types Of NPS Accounts

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The table below explains the two account types in detail.  

The Tier-I account is mandatory for everyone who opts for the NPS scheme. The Central Government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

National Pension Scheme Interest Rate

The NPS interest rate depends on the performance of the assets. Thus, the amount of return received upon retirement cannot be determined beforehand. NPS is a market-linked product where you can invest in a mix of equity, government debt, corporate debt, and alternative assets. Once you decide on the asset mix and fund manager,  the money is invested in specific schemes investing in these 4 asset classes. 

NPS also offer the flexibility to have two accounts – Tier I and Tier II accounts. Below are the returns shown for NPS current interest rate for various schemes of both tier I and tier II accounts (as of 30 June 2024):

NPS Tier 1 Returns:  

NPS Tier 2 Returns:   

*Interest rates provided in the above tables as taken from the NPS website.

Systematic Lumpsum Withdrawal (SLW):

Systematic lumpsum withdrawal is a facility under NPS wherein, upon superannuation exit, the lumpsum corpus can be withdrawn in a phased manner. Subscriber has the option to withdraw the desired amount systematically at regular periodic intervals. i.e, monthly, quarterly, half-yearly or yearly. 

Benefits of Opting SLW as Compared to One-Time Lumpsum Withdrawal

With the SLW facility, the Subscriber will get the following benefits:  

• It will help the Subscriber to generate regular cash flows.
• Along with Annuity, the regular cash flows through SLW will lead to an increase in the Subscriber's monthly income. 
• SLW is a tool for additional Wealth Creation as returns shall continue to accumulate on the remainder Corpus which remains invested under NPS.

NPS Calculator

Calculate the monthly pension and tax benefits you can avail of by investing in NPS through the Cleartax NPS Calculator.

NPS Customer Care Number

NPS Call Centre Number: 1800 110 708

NPS SMS Number: NPS to 56677

NPS Toll-Free Number For Registered Subscriber (with PRAN): 1800 222 080  

Comparing NPS Scheme with Other Tax Saving Instruments

Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is how they are in comparison to the NPS:

The NPS can earn higher returns than the PPF or FDs, but it is not as tax-efficient upon maturity. For instance, you can withdraw up to 60% of your accumulated amount from your NPS account.

Out of this, 20% is taxable. Taxability on NPS withdrawal is subject to change.

Comparing NPS with ELSS

The good thing about the National Pension Scheme is that it has equity allocation. However, the equity allocation is still not as much as tax-saving mutual funds.

Equity-Linked Savings Schemes invest primarily in equities and can generate higher returns than the NPS. The lock-in period of tax-saving mutual funds is also lesser than NPS – only three years compared to NPS.

Also, if you are an aggressive risk-seeker, equity exposure by NPS won’t be sufficient in the long run. Since ELSS can meet that requirement, it serves investors with more risk-appetite better.

How to Login to your National Pension Scheme Account for the First Time?

Step 1: In order to log into your NPS account, you must have a 12-digit Permanent Retirement Account Number (PRAN). Submit the necessary documentation on the NSDL website or at the Point of Presence (POP) service providers to avail PRAN.

Step 2: Visit the official portal of NSDL CRA.

Step 3: Enter your PRAN, Date of birth, new password, confirm password and enter the captcha. After you have entered all the details, click on the submit button.

Step 4: An IPIN will be generated, which you can use for logging into the NSDL portal.

Step 5: Log in to the NSDL eNPS page and click on ‘Login with PRAN/IPIN’.

Step 6: On the next page, use PRAN and IPIN to sign into your NPS account. 

What is the User ID for NPS login?

Your Permanent Retirement Account Number (PRAN) that is offered on registration for the NPS account will be your user ID to log in to the eNPS-NSDL website.

Summary

Hence, consider investing in the NPS scheme if the benefits elaborated above match your risk profile and investment goal. However, if you are open to more equity exposure, many mutual funds are catering to investors from diverse backgrounds available.

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3. How To Open NPS Account 
4. How To Unfreeze NPS Account 
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8. NPS vs PPF: Which is a Better
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10. NPS Tier 1 vs Tier 2: Difference and Tax Benefits
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