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NPS Tier 1 Account – How to Open, Interest Rate, Features, and Withdrawal

Updated on: Jul 1st, 2022


7 min read

National Pension System (NPS) is a retirement cum pension scheme. By investing in NPS, the investors get the dual benefit of tax-saving and retirement planning. We have covered the following in this article:

What is NPS?

National Pension System (NPS) is a government offered retirement planning scheme. It is one of the many investment schemes covered under Section 80C of the Income Tax Act, 1961. By investing in NPS, investors can secure their retirement and at the same time save on taxes of up to Rs 1,50,000 a year. Both private and government employees can opt to invest in this retirement planning scheme. NPS accounts come in different forms. NPS Tier 1 accounts are the most basic form of NPS. NPS Tier 1 accounts come in different forms; NPS (State Government) NPS (Central Government), NPS (Corporate), and NPS (All Citizens). The rules applicable to these accounts vary, but some general rules apply to all.

Eligibility for NPS

The eligibility criteria for NPS is very similar to that of most other government offered schemes. The following are the eligibility criteria to invest in NPS:

  • The applicant must be an Indian citizen
  • The applicant must be in the age bracket of 18-65 years
  • The applicant must invest at least Rs 1,000 to their NPS account
  • The applicant must undergo the Know Your Customer (KYC) process

Features of NPS

The following are the features of NPS Tier 1 accounts:

  • NPS Tier 1 accounts are the most basic form of NPS accounts
  • Employees working in the government and private sectors are eligible to subscribe under NPS
  • Investors can invest as low as Rs 1,000 a year in these accounts
  • Investors can get additional tax deduction of Rs 50,000 under Section 80CCD(1B)
  • Employees can claim a tax deduction of up to 20% of their salary contributed towards NPS
  • Returns earned on NPS are exempted from taxation
  • The NPS account matures once the subscriber retires or attains the age of 60 years
  • On maturity, the subscribers can withdraw up to 60% of the amount accumulated in the account while the remaining 40% is used to purchase an annuity plan
  • Premature withdrawals are allowed on meeting some conditions

How to Open NPS Tier 1 Account?

Applicants can open NPS accounts both online and offline. To open an NPS account offline, one must do the following:

  • Visit the nearest branch of Point of Presence-Service Providers (POP-SP) such as banks
  • Duly fill the offline application form available at POP-SP
  • Attach the requisite documents with the application form and submit
  • Invest the amount you would like periodically

To open an NPS account online, one must do the following:

  • Log onto the eNPS website and navigate to the registration section
  • Enter all the requested information and authenticate with the OTP sent on the mobile
  • Select the preferred account type; under this, you must choose ‘Tier 1’. You should note that you cannot open a Tier II account without having a Tier 1 account already
  • Select the fund manager (there are eight fund houses, choose your preferred one)
  • Select the mode of investment (auto and active modes). Auto mode is the one which allocates and rebalances your portfolio as per the age while the active mode is the one under which you are in charge to choose the assets in your portfolio
  • Furnish the details of the nominees and specify their respective share
  • Upload the requested documents in the prescribed format
  • Make the initial contribution (Rs 500) and complete the registration
  • Your Permanent Retirement Account Number (PRAN) would be generated on completing the registration, store it

Interest Rate on NPS

Unlike other government-backed schemes such as Public Provident Fund (PPF), the returns on NPS are not fixed. The returns on NPS varies as the individuals will have to choose their preferred fund house. Therefore, the returns vary across the fund houses. There are eight fund houses that the investors can choose from and they are: SBI Pension Fund, UTI Retirement Solutions Pension Fund, DSP Blackrock Pension Fund, ICICI Prudential Pension Fund, Reliance Capital Pension Fund, LIC Pension Fund, HDFC Pension Management Company, and Kotak Mahindra Pension Fund. If the applicant does not choose the fund house, then the SBI Pension Fund will be chosen as default.

NPS Withdrawal

  • Withdrawal on retirement/at the age of 60
    However, maximum amount that you can withdraw at the retirement is 60% of the accumulated wealth and balance 40% needs to be utilized for the purchase of annuity providing monthly pension to the subscriber. The withdrawal of 60% of the accumulated wealth in NPS is tax-free.
  • Withdrawal from NPS before retirement (irrespective of the cause)
    If you want to withdraw from NPS before the age of 60 or before retirement (other than the purpose specified for partial withdrawal), the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS and balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for monthly pension of the subscriber. The 20% amount withdrawn is tax-free. However, the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.
  • Withdrawal upon death of Subscriber
    The amount withdrawn in the event of death of the subscriber shall be exempt from tax. The entire accumulated pension would be paid to the legal heir/nominee of the subscriber. However, in case of govt. employees, the entire amount cannot be withdrawn. Purchase of annuity plan is mandatory by the nominee.
  • 100% withdrawal at the time of retirement/attaining the age of 60
    In case the total corpus in the account is less than Rs. 5 lakh as on the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the subscriber (other than Swavalamban subscribers) can avail the option of complete Withdrawal.
  • 100% withdrawal before retirement/attaining the age of 60
    In case the total corpus in the account is less than Rs. 2.5 lakh as on the before attaining the age of 60, the subscriber can avail of the option of complete withdrawal.

Subscribers are also to make premature withdrawals on the following conditions:

  • The subscriber must be enrolled under the NPS system for a minimum of three years
  • The amount of withdrawal is not more than 25% of the subscriber’s contributions
  • A subscriber can make a maximum of three withdrawals thought the tenure of NPS subscription
  • Withdrawals can be for particular reasons such as children’s education, marriage, purchase of a property, and treatment of severe illnesses

NPS is an excellent retirement cum pension scheme. Investors will get the dual benefit of tax deductions and retirement planning. NPS is an excellent means to set aside a nominal sum periodically to secure one’s retired life.

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Quick Summary

National Pension System (NPS) is a government-offered retirement planning scheme providing tax-saving benefits. Eligibility includes being an Indian citizen aged 18-65, investing a minimum of Rs 1,000, and undergoing KYC. NPS Tier 1 accounts offer tax deductions, flexibility in investment amounts, and returns exempt from taxation. Withdrawal options include retirement, premature withdrawal, and death of subscriber. It offers various fund houses to choose from for investment returns.

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