Mention retirement and multiple images conjure up – travel, beach resort, and lazy days, catching up with friends and more. All of these desires are possible as long as one works towards them. Unlike many other financial aspects in life, retirement is different. Retirement is the phase when you do not have any active income; you do not work anymore to earn. What this means is that you need to have saved and invested enough money to last you through your life from the day you stop working.
Unlike several developed countries that have state-provided social security to citizens, we do not have any such state support. The salaried have some form of mandatory savings towards retirement with EPF (employee’s provident fund) and several other means to create a retirement corpus. Unlike an earlier era, when family members took care of their elders, the concept of nuclear families practically leaves it for you to fend for yourself in retirement. These days, with increasing longevity, retirement could last for up to 30-40 years, which requires adequate funds to plan for.
Perhaps, keeping these issues in mind, the government of India felt the need to create a pension system to encourage people to save towards their retirement. The NPS or the National Pension System (NPS) is a voluntary retirement scheme set up by the government through which you can save for your old age pension or create a retirement corpus. The scheme was launched for government employees from January 1, 2004, and from May 1, 2009, to all citizens of India. The NPS is regulated by the PFRDA (Pension Fund Regulatory & Development Authority).
What’s NPS?
The NPS or National Pension System is a voluntary retirement scheme through which you can create a retirement corpus or your old-age pension. It’s managed by PFRDA (Pension Fund Regulatory and Development Authority) and available to all Indian citizens (resident or non-resident) between 18 and 65 years old. One can join the NPS as late as when they are 60 years old and continue to contribute until they are 70 years old.
The NPS is useful for employees, employers, and also the self-employed. While employees and self-employed can subscribe to the NPS independently, employers have the choice to offer NPS or PF to their employees. Employers could also move existing PF benefits of employees to NPS if it’s mutually agreed upon.
Account Types under NPS
There are two different accounts to consider under the NPS – Tier I and Tier II. The Tier I account is the retirement account and comes with a host of tax benefits, but you cannot withdraw your contributions till you reach the age of 60. The Tier II account has no restrictions, and you can take out money anytime you want.
The Tier I account is mandatory, and when opening an NPS account, it is automatically functional. In contrast, Tier II can be opened only when one already has a Tier I account and can be opened with an additional application form.
Although Tier I has restrictions, there are conditions under which partial withdrawal is allowed earlier, such as cases when the subscriber has a critical illness or needs money for children’s education, wedding expenses, buying or constructing a house. The structure of the scheme has been created to ensure maximum lock-in so that the money gets used to fund retirement.
Read : Comparing Tier I and Tier II NPS
How your contributions get invested?
As an NPS subscriber, you are required to make an initial minimum contribution of Rs 500 under the Tier I account and Rs 1,000 for Tier II at the time of registration. Subsequent contributions, as well as frequency, could vary, but one needs to make an annual minimum Rs 1,000 contribution annually under Tier I and Rs 250 under Tier II.
Investments in NPS are market-linked, which deploy funds under three different funds that are governed by the asset classes in which your contributions can be invested. The broad asset classes are Equity (E), Corporate bond (C), Government securities (G), and Alternative Investment Funds (A), which have further choices within (See: Available asset classes).
| Available asset classes |
| Same for both Equity (E): Scheme invests predominantly in Equity market instruments. |
| Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments |
| Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments |
| Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc. |
To provide choice, the NPS funds are regulated by the PFRDA, and 7 pension fund companies are managing the schemes. These entities actively manage the four different types of asset classes permitted by the regulator as per the investment guidelines provided.
Within the available asset classes, NPS subscribers can opt for active or auto choice for asset allocation. In the active choice, the subscriber decides how much money gets invested in each asset class
While in automatic choice, asset allocation gets determined based on the subscriber’s age. There are advantages under both options, and the choice should be based on how much you feel confident to manage the allocation on your own. Given the long-term nature of the NPS, there is the flexibility to move between the two variants. However, one needs to exercise choice in advance and only once in a financial year.
Read: Active and auto choice with NPS funds
| Pension fund management companies |
| 1. SBI Pension Funds Private Limited |
| 2. UTI Retirement Solutions Limited |
| 3. LIC Pension Fund Limited |
| 4. Kotak Mahindra Pension Fund Limited |
| 5. HDFC Pension Management Company Limited |
| 6. ICICI Prudential Pension Funds Management Limited |
| 7. Birla Sun Life Pension Fund Manager |
Read: Annuity and NPS: Everything to know
Tax Benefits of NPS
The NPS has its share of income tax benefits both at the time of making contributions and at the time of withdrawal on maturity. Individual taxpayers can claim deduction on contributions under Tier I NPS up to Rs 1.5 lakh in a financial year under Section 80C. Further, NPS subscribers can claim an additional deduction for investment up to Rs 50,000 in Tier I account in a financial year under Section 80CCD (1B) over and above the Rs 1.5 lakh deduction under Section 80C. However, contributions to Tier II do not provide any tax benefits.
NPS Withdrawal on Maturity
When you reach the maturity age, which is 60 years, you can withdraw the entire corpus from Tier I, of which only 60% is exempt from tax as with the remaining 40%, one has to purchase an annuity mandatorily.
An annuity is a fixed sum of money that you receive every year for your lifetime. An annuity is purchased by paying a lump sum to the seller, which is an insurance company. There are different types of annuities to suit the different needs of the annuitant. Remember, an annuity is treated as income and added to your other income sources and taxed as per the tax slab you fall in. Likewise, the entire corpus under Tier II is fully taxable as it is treated as income.
| Types of Annuities | |
| Life Annuity | Pays uniform rate of pension till subscriber survive |
| Life & Certain | Pays 5, 10, 15 or 20 years of certain pension & then till the time subscriber survive. |
| Life & Repurchase | Pays for life and then return the purchase price to nominee |
| Inflation-Linked | Pays for life with increase in pension amount @ 3% p.a. |
| Life & Survivor | Spouse is also covered. Pension paid till the life of subscriber, and post-death also paid to the spouse |
The NPS Advantage
The full tax benefits on both contributions and partial tax benefits on maturity aside, the NPS offers a choice of investments that is unavailable compared to other forms of retirement savings.
On the cost front, NPS operational charges are governed by the NPS trust, and currently, there is an initial subscriber registration charge of Rs 200. Then, you have the account opening cost of Rs 40 with annual account maintenance cost in the range of Rs 60 – Rs 95, and each transaction costs about Rs 3.75.
The Pension Fund Manager (PFM) charges 0.01% on the assets managed, and the custodian is charging 0.0032% as an asset servicing charge. The POP has charges too on every transaction, but collectively these are globally amongst the lowest on any financial product. The NPS is currently the most economical and tax-efficient retirement product available. Not only is it cost-effective and tax-efficient, but it also has features such as portability, the flexibility of choice across assets, and fund managers and is regulated by the PFRDA.
Bottom line:
Planning for retirement is a challenge, and it’s tricky to know exactly how much you will need to sail through your retirement years beforehand. There are several tools to estimate this corpus, which use either an income replacement or an expense replacement technique. Ideally, you assume the number of years you may live in retirement, and multiply that by the annual expenses or annual income that you have just before retirement.
But things aren’t as simple because you also need to factor inflation, unexpected expenses arising out of emergencies, or a health ailment that costs more than the insurance you have. What you can do is to opt for NPS and make it your core retirement savings and supplement it with other available instruments to build a retirement corpus which complements your financial needs.
How is investing in a corporate model of NPS with my employer different from investing on ET money app?
Dear Wesley Pandiaraj, thank you for your question. The corporate model of NPS is available only to individuals who are employed with an organization offering NPS. The NPS we provide through ETMONEY App is the All Citizen’s Model that can be availed even by self-employed individuals who want to save for their retirement.
If I selected the lumpsum payment option while creating an NPS account through the ETMONEY app. Will there be any choice to change that option to Monthly SIP?
Hi Kaushal,
You can start a SIP anytime you want on the ETMONEY app. There is no connection with a one-time lump sum investment you might be doing
Simply fantastic article. Many thanks for sharing the same and highlighting various pros of maintaining this account.
I am already subscribed to NPS thru ETMONEY and trust me when I say this : It’s totally hassle free. I pay thru UPI or even set a SIP. Thank you ET Money for providing a simple yet effective platform for users. Good luck to all and start investing in NPS.
I want to know
1-the money that goes in equity ,whether it is allocated in index funds or fund manager selects funds according to his choice ?
2- can we buy the annuity with the whole amount ?
3- state govt do not give the provisions of active choice , if I am an govt employee and I want to select active choice , is there any provision for me to select my choice?
Hi Harshajeet,
On the first point, the equity portion of the NPS is actively managed. The fund manager builds a portfolio with your money. The second point, technically you can buy. The 60% that comes to your account at maturity, you can go buy an annuity product on your own. NPS will transfer only 40% to the annuity partner you select. On the third point, while the central government has provided this flexibility, we are not sure about states because the rules are decided by each state.
Hi there, To save tax of 50k app is asking me to invest Rs 12500 from today so by this year I will save tax of 50k but Is it possible to invest 4k per month after this financial year?
Hi This is Krishna,I have a quiery, that how do I open nps account online.
Hi Krishna,
It’s super easy to invest in NPS. Just download the ETMONEY app and go to the NPS section. A few steps and your account will be opened. In case if you face any difficulty, let us know, we would be glad to assist you at help@etmoneycare.com or can also connect us at 9205231523.
Hi Amol,
Yes. You can modify your SIP post-March. We look forward to seeing your SIP in NPS 🙂
Regarding Annuity for 40 percentage of final corpus amount. Do I need to purchase insurance after 60 years or I need decide that right at start of investment?
As per the current NPS maturity rules, at the age of 60, you can withdraw up to 60% of the corpus and on the balance 40 percent of that amount you have to buy an annuity.
My question is does this investment in NPS chargeable for recovery of any government dues or dues fixed by any court of law?
No, the Balance in your National Pension System (NPS) account is protected under Section 6(a) of the Pension Fund Regulatory and Development Authority of India (PFRDA). Hence, the subscriber’s money in the NPS account is not liable to seizure or attachment by a court on application of a creditor.
when should one start planning for NPS in their life ?
National Pension System (NPS) is a pension cum investment scheme launched by the Government of India to provide old age security to Citizens of India. It brings an attractive long term saving avenue to effectively plan your retirement through a safe and regulated market-based return. Hence you should start investing in them at an early age so that you could build a sufficient retirement corpus. Also, by investing in NPS, you will get an additional deduction for investment up to Rs 50,000 under Sec 80CCD(1B). This is over and above the deduction of Rs 1.5 lakh available under sec 80c of the income tax act.
Very nice article. For claiming the additional 50k under NPS , it has mentioned as over and above 1.5L in 80c. My doubt here is if I invest just 50k in tier 1 will in be eligible for this tax exemption.? Or should I invest 2L in NPS. ( 1st 1.5L goes to 80c and remaining 50k in 80ccd 1. )
But I’ve already exhausted my 80c with other investment tool- SSY alone. So is it enough to invest 50k to get the tax exemption in 80ccd 1.
Yes, if you have exhausted the Section 80C limit of Rs.1,50,000, then consider investing in NPS
Deduction for self-contribution to NPS – section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account.
my PPF contribution is 1.5 Lakhs.
I wish to invest 50K in NPS for tax benifit under 80CCD1(B).
over and above this investment how much amount can I invest in NPS ?
Hi,
You can invest as much as you want to invest in Tier 1. There is no limit on that. But you will only get tax benefit on the amount of Rs. 50,000 under the section mentioned by you.
We hope this helps!
I am central Govt. Employee, I am NPS tier-1 Account, my service completed 12 years, now I want to withdrawal 25% of amount to perchase the Land/House, In my account 20 lakh are there, tell me how much amount i will get either 5 lakh or 2.5 lakh. If I get 2.5 lakh where another 2.5 lakh will go. Please suggest me for the process. Can I show/ attach the Agreement document in office for withdrawal.
The maximum amount which is allowed to be withdraw is 25 % of the contribution made by the subscriber and not the total amount accumulated in the fund.
For instance, you have invested Rs 6 lakhs in the NPS so far. This is your contribution towards the scheme. Let’s assume if after 11 years the Rs 6 lakhs grows into Rs 14 lakhs. And if you want to withdraw some amount, you will be allowed to withdraw up to 25% of the contribution which is Rs 6lakhs ant not Rs14 lakhs i.e. 25 % of 6lakhs is Rs 1.5 lakhs.
Nice, well explained and answered too Thanks to all the folks who asked several queries.
What is the difference of lump sum value and annuity value can you please explain
Annuity in the context of NPS refers to the monthly payment that will be received by the subscriber from the Annuity Service Provider after his exit from NPS. Annuity Service Provider is an IRDA registered insurance company empanelled by PFRDA for providing of Annuity Services to NPS subscribers upon their exit from the system. ASPs will be responsible for managing the funds (allocated for buying annuity) and payment of the pension after a subscriber attains the age of 60.
Small doubt If I am investing in NPS through corporate model then 10%of basic +da. So is there any upper limit in 80ccd2 also need to understand if i invest through my own let say 50000 under ccd1 as 1.5lacs is exausted….in that case i will be getting benefits of both 80ccd1vand 80ccd2 or only one. Or max is 50000 only additional to 1.5lacs
Yes, You can invest in NPS up to 50,000 for additional tax saving benefits under Section 80CCD (1B) of the Income Tax Act. Read More About it from here : https://www.etmoney.com/blog/should-you-invest-in-the-nps/
Very useful article. thank you
We are glad you liked this, Arpana
Nice blog
I have 2 query
1) after maturity how much i have to pay tax on annuity ? Is there any way to save tax on full mature amount ?
2) my company contributing in my EPF account , is EPF and NPS same or can i open it separately ?
1) There is no tax incentive with annuities, as the annuity that one received is treated as income and taxed according to the slab rate that one falls in. Read More about it from here : https://www.etmoney.com/blog/annuity-and-nps-everything-to-know/
2) No , EPF is different to NPS, however both are Retirement product. You can start Investing in NPS and Save for your Retiremenr. Read more about it from here https://www.etmoney.com/blog/should-you-invest-in-the-nps/
My spouse age is 58. Can I invest in NPS
Hi, NPS account can be opened by Indian citizens above 18 years and less than 65 years of age, after the latest change. Read more in detail from here: https://www.etmoney.com/blog/nps-everything-you-need-to-know/
Hi myself sachin singhal,
If a subscriber is died before attaining an age of 60 year, how much amount the nominee will get? Only principal invested amout or current value of funds.
Thanks
If a NPS subscriber dies before reaching 60 years of age the accumulated pension amount is paid to the nominee or legal heir of the subscriber. … There is no need to purchase any annuity or monthly pension by the claimant.
Hi I need to know does pf and other benefits under 80c has limit of 1.5lakhs what benefiting get with nps.
You can invest in NPS up to 50,000 for additional tax saving benefits under Section 80CCD (1B) of the Income Tax Act. This deduction is in addition to the ₹ 1.5 lakh allowed under Section 80C. You can read more in details about Why NPS is the great option to save for your Retirement from here https://www.etmoney.com/blog/should-you-invest-in-the-nps/
By end of this financial year, how much should I invest to avail₹50,000 tax benefit?
Hi, this will depend on the tax slab you fall under. Please read in detail from here : https://www.etmoney.com/blog/nps-everything-you-need-to-know/
I have a APY account,
What should I select when you ask,
“do you already have an account?”
APY account is different from NPS, you need to open a separate account for NPS.
Very useful user friendly application.
Can we get tax benefit above 150000/-from my Employer NPS account if i already invested Rs 150000/- in 80C?
Investment of up to ₹ 50,000 in NPS for all subscribers, whether salaried or self-employed, qualifies for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This deduction is in addition to the ₹ 1.5 lakh allowed under Section 80C
If an NPS subscriber dies before 60, what happens to his money?
If a NPS subscriber dies before reaching 60 years of age the accumulated pension amount is paid to the nominee or legal heir of the subscriber. … There is no need to purchase any annuity or monthly pension by the claimant.
If a nps invester died before 60 year age then what about his investments and how can his nominee claims .
If a NPS subscriber dies before reaching 60 years of age the accumulated pension amount is paid to the nominee or legal heir of the subscriber.
I understand that if the balance in tire 1 is less than or equal to its 2.00 then the entire amount can be withdrawn. Please confirm if my understanding is correct ?
Yes, In case the total corpus in the account is less than Rs. 2 Lakhs as on the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the Subscriber can avail the option of complete Withdrawal.
If subscribe of tier 1 account accidentally no more before maturity age .than how NPS work and how much return get his nominee.
If a NPS subscriber dies before reaching 60 years of age the accumulated pension amount is paid to the nominee or legal heir of the subscriber.
I seek clarification on – “When you reach the maturity age, which is 60 years, you can withdraw the entire corpus from Tier I, of which only 60% is exempt from tax as with the remaining 40%, one has to purchase an annuity mandatorily”.
e.g- 100 invested today turns 150 at 60 yrs. What amount can be withdrawn at maturity age of 60? How much of that is taxable?
Dear Manab, we appreciate your question. To continue with your example, suppose the corpus amount in the Tier 1 account at the age of 60 years is Rs. 150. Now as 60% of the corpus can be withdrawn tax-free, in this case Rs. 90 can be withdrawn tax-free and the remaining Rs. 60 i.e. 40% of the corpus has to be mandatorily used to purchase annuities. Hopefully this helps clear your doubt.
I am so confuse on 40% life annuity that is mandatory to buy what happened to this 40 % life annuity teir 1 after death of annuitant
Hi Surya,
What happens after death depends on the kind of annuity type you have opted for. There are types where your spouse keeps getting 50% or 100% the annuity till his/her death with the original purchase price being returned on the death of the last survivor.
My PPF account with good amount is maturing by ensuing March end. Since I am 70 years old I want to use this amount . Whether is it possible to invest this corpus in NPS and draw monthly pension ? Last 35 years I didn’t touch my PPF account. Now on maturity day entire sum can be invested in NPS. Let the pension sum be released from the next following year. Is there any such scheme available ?
Hello Sir, Unfortunately, you won’t be able to invest in NPS because the maximum age allowed for investing in NPS is 65.
Hi,
What are the different ways of investing in NPS? Why should one choose ET Money App over other ways?
Hi Dhiraj, You can invest in NPS either through your employer (if they offer NPS) or individually. On why you should ETMONEY, well that’s because we are India’s only app that allows you to invest in NPS. Not only that, we are the only place where the entire process is completely paperless. No printing, no signature. Nothing.
Very very useful points mentioned in this article.A layman even can understand..Keep posting this kind of article which will boost financial health of individual. Thanks a ton.
Thanks Sanghamitra
Is this relevant even after the new tax regime announced in budget on 1st Feb 2020?
Hi Yugal,
Yes. It is relevant. The Budget gives you two options. Either you stick to the old regime where you claim all deductions/exemptions including one offered for NPS but you pay higher tax rate OR you pay lower tax rate but can’t claim any deductions/exemptions. Either way, you should not be investing in NPS only because it offered tax benefits. Being financially ready for retirement should be the primary reason and tax benefits an addded advantage.
Which account I m getting ,while invest through ETMONEY ?tire 1 or 2?
Hi Yatin,
Since Tier 1 account is mandatory to start investing in NPS, you will be get Tier 1 account when investing through ETMONEY.
Is the investment amount should be same over the year or we have the liberty to invest what we have over time?
Hi Chandru,
No. You don’t need to put the same account every year. You can pick any amount as long as it is higher than the yearly minimum contribution amount of Rs. 1,000.
Thanks nice article
How do i invest in NPS
Hi Vikrant, It’s super easy to invest in NPS. Just need to go to the NPS section and follow a few steps and get done with your investment. And, in case if you face any difficulty, let us know, we would be glad to assist you at help@etmoneycare.com or can also connect us at 9205231523.
I am so confuse on 40% life annuity not understand what does that means so can anyone brief about
Example if I starts Investing in NPS 50,000 PA my age is 34 now .. how they can benefit me apart from tax investment
Pls brief
You can take out corpous after the savings. So minimum annuity should be 40 percent of the total money. And the rest is take home
Hi Pawan,
NPS is a retirement product, wherein you invest to save for your retirement. At the age of 60 years, you can get 60% of the accumulated amount in your bank account, and with the remaining 40%, you have to buy an annuity product. Annuity products are offered by life insurance companies and when you buy these products you get a fixed income after a regular interval. In NPS, that interval is monthly and this will ensure you get a regular pension in your old age.
How invest through Etmoney
Hi Prabhakar,
It’s super easy to invest in NPS on ETMONEY. Just go to the NPS section on the app.
Step 1: Once you go to the NPS section, therein you will see the option of “Invest now”. Tap on it.
Step 2: This will redirect you to the next screen on the Investment plans, that you can select as per your risk appetite
Step 3: Once you proceed further, next on the screen, it will ask you for the pension fund manager that you want to handle your Investments.
Step 4: Select the amount and proceeds further for the payment.
That’s it ! There is no paperwork and it’s super fast.