What is NPS (National Pension Scheme)?

Retirement planning is important and various schemes help you prepare for your golden years. The National Pension System (NPS) is one of them. Read on, if you want to know what is National Pension System, its features and benefits and how to use it effectively to save for your retired life.

What is NPS?

NPS is a voluntary, government-sponsored pension programme designed to provide a stable income after retirement. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

NPS accounts come in two types: Tier I, which is non-withdrawable until 60 years, and Tier II, which allows withdrawals at any time. In the unfortunate event of your demise before 60 years, the accumulated sum is paid to your nominee or legal heir.

Your pension amount at retirement depends on the contributions you make during your working years and the market-linked returns on it. NPS also offers tax-saving benefits.

How does NPS work?

How it works:

1. Registration:
Individuals can register for NPS through various online portals, banks, or offline centres, making it accessible and convenient for everyone.

2. PRAN:
Upon successful registration, each subscriber is allotted a unique Permanent Retirement Account Number (PRAN), which serves as their lifelong identifier for all NPS-related transactions.

3. Contributions:
Subscribers make regular contributions to their Tier I account, which is primarily meant for retirement savings, with the option to contribute to a Tier II account for flexible withdrawals. Contributions can be automated for disciplined savings.

4. Investment:
The contributions are invested in a diversified mix of asset classes, including equity, corporate bonds, and government securities, based on the subscriber’s risk preference. This helps in long-term wealth while balancing risk and returns.

5. Withdrawal:
Upon retirement, subscribers can withdraw a portion of the corpus as a lump sum, while the remaining amount is used to purchase an annuity, ensuring a steady, regular pension.

Objectives of NPS

• Ensures a significant amount of savings to meet financial needs and expenses post-retirement
• Provides a stable income stream during your retirement years
• Encourages financial discipline by promoting regular savings throughout your working life

Features of the National Pension System

Key Features of NPS:

1. Defined Contribution
NPS is a defined-contribution scheme, which means the retirement corpus depends on the contributions made and the returns earned over time.

2. Voluntary
NPS is open to all Indian citizens, including salaried, self-employed, and those in the unorganised sector.

3. Government Backed
NPS is backed by the Government of India and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring security, transparency, and credibility for investors.

4. Portability
NPS accounts are portable across India, allowing subscribers to continue their contributions even if they change jobs, cities, or states.

5. Flexibility:
Subscribers can choose their investment mix across equities, corporate bonds, and government securities, and select preferred pension fund managers to align with their risk appetite and retirement goals.

6. Tax Benefits
Contributions to NPS qualify for tax deductions under Sections 80C, 80CCD(1), and 80CCD(1B), making it a tax-efficient way to save for retirement.

7. Two Account Types:
NPS has two account types: Tier I (mandatory retirement account with restrictions on withdrawal) and Tier II (voluntary savings account with flexible withdrawal options).

How to open an NPS account?

Opening NPS account online

• Visit the eNPS portal
• Select your subscriber type and choose between Tier I or both accounts
• Enter your PAN details and select a suitable bank or PoP for KYC verification
• Upload scanned copies of your PAN card, cancelled cheque, photograph and signature
• Choose your pension fund manager and the preferred investment option, and pay the account opening amount
• Receive your PRAN upon successful payment

Opening NPS account offline

• Locate a PoP, such as one of the designated Axis Bank NPS branches
• Download and fill out a subscriber form and submit it with your KYC documents
• Make the initial contribution
• Receive your PRAN and a welcome kit with a password to operate your account

Tax benefits

• Section 80CCD(1): Deduction up to ₹1.5 lakh for your contributions to Tier I, within the Section 80C limit
• Section 80CCD(1B): Additional deduction up to ₹50,000 for Tier I contributions, over and above the Section 80C limit
• Section 80CCD(2): Employer contributions to Tier I are deductible up to 14% for Central Government employees and 10% for others, exceeding the Section 80C limit.

Additional tax benefits

• Withdrawals: Up to 25% of Tier I contributions are tax-exempt
• Annuity purchase: Tax-exempt at purchase, but annuity income is taxable
• Lump sum withdrawal: Up to 40% of the corpus is tax-free once you cross 60 years of age

Conclusion

The National Pension System (NPS) is a secure and flexible retirement savings option that combines market-linked growth with tax benefits. With Axis Bank, opening and managing your NPS account is seamless, allowing you to plan for a financially stable and stress-free retirement while enjoying easy contributions and professional fund management.

NPS lets you choose your investment mix across equity, corporate bonds, and government securities, aligning with your risk appetite. You can make contributions regularly or as a lump sum, giving flexibility in retirement planning. The scheme is portable, so your account remains active even if you change jobs or cities. Tax benefits under Sections 80C and 80CCD make NPS a cost-effective way to save for the future.

Partial withdrawals are allowed under specific conditions, offering liquidity when needed. With Axis Bank’s robust digital platforms, you can track, manage, and optimise your NPS investments anytime, ensuring hassle-free retirement planning.

Also Read: How to build a robust retirement corpus with NPS?

Frequently Asked Questions

Who is eligible to join NPS?

Any Indian citizen aged between 18 and 70 years, including NRIs, can benefit from NPS.

How much pension is given in NPS?

Since NPS is a defined contribution scheme, your pension amount depends on your total contributions and the market-linked returns generated, with no fixed amount guaranteed.

Is NPS better than PPF?

NPS offers potentially higher returns owing to its market-linked investments, whereas PPF provides guaranteed returns.

Is NPS tax-free on maturity?

At maturity, 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity. The income generated from the annuity is taxable.

Is NPS a good investment?

Yes, NPS is considered a good long-term investment as it offers market-linked returns, tax benefits under Section 80C and 80CCD, and a disciplined retirement savings approach. It suits investors looking for a mix of equity and debt exposure.

What happens to NPS if I quit my job?

If you quit your job, your NPS account remains active. You can continue contributing voluntarily or leave it until retirement. You’ll receive your accumulated corpus at retirement, subject to partial withdrawal and annuity rules.

What is the age limit for NPS?

You can join NPS between 18 and 70 years of age. Contributions can continue until the age of 85 for voluntary account holders. Early starters benefit from longer compounding, helping build a larger retirement corpus over time.

How long will NPS give a pension?

NPS provides a pension for life through an annuity after retirement. The corpus can be partially withdrawn, but the remaining amount is used to purchase an annuity, ensuring regular post-retirement income.

Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.