All about National Pension Scheme – Investment, Withdrawal & Tax implications


          The National Pension System (NPS) is a voluntary defined contribution pension system in India. It has been introduced by the Government of India in the year 2004 to provide Retirement Savings Benefits to the Central Government Employees. In the year 2009 it was opened up for all Citizens of India between the Age of 18 and 60.


          Any Citizen of India, whether resident or non-resident are eligible subject to following conditions:

  1. The individual should be aged between 18 and 60 years.
  2. The individual is of Sound Mind.
  3. The individual should comply with the KYC norms as in the Registration Form.

           The Following Applicants cannot join the NPS:

  1. OCI and POI in the category of people who cannot open NPS account.
  2. Un-discharged insolvent.
  3. Individuals of Unsound mind.
  4. Pre-existing account holders under NPS.

Key Features of NPS:

  1. The activities of the scheme are regulated by the Pension Fund Regulatory and Development Authority.
  2. The Funds are managed by the Fund Managers from Public or Private sector with proven track record.
  3. Every Individual is issued a Permanent Retirement Account Number Card.
  4. Unique I-Pin is allotted to every individual under the NPS.
  5. NPS account can be operated from anywhere in the country irrespective of Employment and geography.
  6. Account holders can Shift from one sector to another.

Investment in NPS:

      Two Accounts in NPS-

  1. Tier-1 Account.
  2. Tier-2 Account.

Please note: Tax benefits are applicable for investments in Tier I account only.

Tier-1 Account:

        It is a Pension Retirement Account in which the individuals can contribute their savings. Tier-1 is a very basic form of retirement account. 60% lump sum that is withdrawn at retirement is taxable in that year. 40% corpus under annuity is taxed yearly as per the individual’s IT slab

Contribution in Tier-1 Account:

  1. Minimum contribution at the time of Account opening – ₹500.
  2. Minimum amount per contribution – ₹500.
  3. Minimum total contribution in the year – ₹6000.
  4. Minimum frequency of contributions – 1 per year.

Tier-2 Account:

        It is an Investment Account/Savings Account in which the individuals can contribute their savings and can withdraw as and when required. It can be opened after opening of Active Tier-1 Account.

Contribution in Tier-2 Account:

  1. Minimum contribution at the time of Account opening – ₹1000.
  2. Minimum amount per contribution – ₹250.
  3. Minimum total contribution in the year – ₹2000.
  4. Minimum frequency of contributions – 1 per year.

Investment Schemes/Approaches in NPS:

  1. Active Choice.
  2. Auto Choice.

 Active Choice:

           The Individual will have the option to actively decide as to how is NPS pension wealth is to be invested in three different options i.e.

  1. Asset Class E – investments in predominantly equity market instruments (Higher Return, Higher Risk)
  2. Asset Class C – Investments in fixed income securities other than Government securities (Medium Return, Medium Risk)
  3. Asset Class G – investments in Government securities (Low Return, Low Risk)

             The individual can choose to invest is entire contribution in C or G Asset Classes and upto a maximum of 50% in E Asset Class.

Auto Choice:

           If the Individual do not have the financial and investment knowledge and unable/unwilling to exercise any choice of investment, then their contribution can be invested in accordance with the Auto choice option.

           In this option, the investments will be made in a Life-Cycle Fund. The fraction of Funds invested across three asset classes will be determined by a pre-defined portfolio.

          At the lowest age of entry (18 years), the auto choice will entail investment of 50% in “E” Class,

30% in “C” Class and 20% in “G” Class. The Ratio of investment will remain fixed for all contributions until the individual reaches the age of 36.

          From age 36 onwards , the weight in “E” and “C” asset will decrease annually and the weight of “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.

Withdrawal of Investment:

        Types of Withdrawal-

  1. Normal Retirement.
  2. Pre-Mature Retirement.
  3. Death of Individual.
  4. Partial Withdrawal.

Normal Withdrawal:

           The Individual has to submit withdrawal form through online or offline. The Individual has to invest minimum 40% of Amount to purchase Life Annuity from any IRDA regulated life insurance company. The  Remaining Amount can either be withdrawn in lump sum on attaining the age of 60 or in a phased manner, between age 60 and 70,at the option of the Individual.

Premature Withdrawal:

            The Individual has to invest at least 80% of Amount to purchase Life Annuity from any IRDA regulated life insurance company. The Remaining can be withdrawn in lump sum.

Withdrawal in case of Death:

             The Entire Accumulated Amount would be paid to the Nominee/Legal Heir of the Individual and there would not be any purchase of Annuity/Monthly Pension.

Partial Withdrawal:

  1. Withdrawal amount will not exceed 25% of Contribution made by the Subscriber.
  2. There should be a gap of five years between two withdrawals
  3. Maximum three withdrawals are allowed during the entire tenure.
  4. Withdrawal is allowed only against specified reasons-
  5. Higher Education of Children.
  6. Marriage of Children.
  7. For the purchase/construction of residential house.
  8. For treatment of critical illnesses.

Taxation of NPS:

  • As per Sec 80CCD(1) An Employee can claim deduction upto a maximum of 10% of Salary.
  • Additional ₹50000 is given as a deduction under Sec 80CCD(1B).This deduction is over and above the deduction allowed under Sec 80CCD(1).
  • In case of Normal Retirement 60% of Total Amount payable to the Individual shall be Exempt from tax.
  • In case of Premature Withdrawal 20% of the Amount withdrawn will be tax free.
  • In case of Partial withdrawal 25% of Amount can be withdrawn without any tax implication.
  • In case of Death the entire amount withdrawn is tax free.
  • Amount invested in Annuity is fully exempt from tax. However, annuity income will be subject to income tax.
  • The tax deduction is not allowed for Tier-2 Account.

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