Decoding how to open an NPS account
The National Pension Scheme (NPS) is aimed at providing financial security to people after retirement. It was launched in 2004 primarily for Government employees, but in 2009 it was revised to allow all citizens of India to be a part of the scheme.
Am I eligible to be part of the NPS?
If you are an Indian citizen (either resident or non-resident), between 18 – 65 years of age when you submit the NPS application, you are eligible to be a part oḤf the scheme. For NRIs, NPS contribution is subject to regulations prescribed by the Reserve Bank of India and Foreign Exchange Management Act. People in low-income strata aged between 18 -60 years can be a part of NPS-Lite through an aggregator and contribute till age 60. However, Overseas Citizens of India, Person of Indian Origin cardholders and Hindu Undivided Family are not eligible to open an NPS account.
Before you consider opening an NPS account, it is important to know what are the different types of NPS accounts available for investment. The government provides two account options – Tier 1 and Tier 2.
Which account should I opt for?
1. Tier 1 account: Tier 1 is the mandatory base retirement or annuity account. The amount collected in this account will be used to provide your monthly income when you retire. The money you invest in this account will be locked in for three years. You will only be able to withdraw money after the lock-in period, and it will be limited to 25% of all the contributions made.
2. Tier 2 account: After you register for a Tier 1 account, you will be given a unique PRAN (Permanent Retirement Account Number). Your Tier 2 account is a voluntary saving account linked to your PRAN. This account offers more flexibility on investments and withdrawals you can make. You can also transfer the amount from this account to your Tier 1 retirement account. All eligible people can open a Tier 2 account, except NRIs.
What returns can I expect?
Returns on the NPS are subject to market volatility, and they provide wide coverage for your retirement. You can find the returns of each scheme here.
For instance, if you are 30 years old and you open an NPS account. You start with Rs. 1000 monthly contribution, and invest for 30 years, till you are 60. Over 30 years you will invest Rs. 3,60,000 and you will build a corpus of Rs. 22,79,326. If you purchase an annuity for the minimum allocation of 40%, you will get a monthly pension of Rs. 4,559. You can withdraw the remaining 60% of the amount – Rs. 13,67,596, as a lump sum withdrawal.
How can I open an NPS account?
There are two ways you can join the NPS. The first is by visiting Point of Presence – Service Providers (POP-SP). You need to fill out a PRAN application form by filling out your details, signature, scheme preference, photograph, and submit your KYC details that establish your identity and proof of address. After submitting the form, you need to track your application and make your first contribution.
The second way to register is by online application. For this, you must have the following documents with you:
Scanned copy of Permanent Account Number (PAN) and cancelled cheque in file size between 4KB – 2MB
Scanned copy of your photograph and your signature in file size between 4KB – 5MB
Netbanking details
You need to login to eNPS and click on National Pension Scheme for registration. You’ll then add your details and the phone number linked to your PAN for verification. In the next step, you’ll choose your account type, pension fund manager, and investment mode. There are two mode options – Auto mode, that rebalances the portfolio based on your age, and Active mode, that provides you with the flexibility to make the allocations yourself.
You then need to choose your nominees, upload documents, and make an initial contribution to get registered and generate your PRAN. Finally, you need to e-sign or courier the completed form to keep your NPS account functional.
What’s the minimum amount to contribute?
You need to make an initial contribution of Rs. 500 for a Tier 1 account, and Rs. 1000 for a Tier 2 account. Contributions to the Tier 1 account have specific requirements. You need to make at least one contribution a year, and the minimum amount per contribution is Rs. 500. Overall, you need to contribute at least Rs. 1000 a year. For Tier 2, there’s just one rule that the minimum contribution is Rs. 250.
Do I get tax benefits?
Yes, you can avail tax benefits under the Tier 1 account and claim under Sec 80 CCD (1) within the overall cap of Rs. 1.5 lakhs exemption under Sec 80 CCE. You can also avail additional tax deduction of up to Rs. 50,000 under subsection 80 CCD (1B). You will also get tax benefits on 25% of the partial withdrawal you make before 60 years. Also, up to 40% of the lump sum withdrawal after age 60 will be exempted for tax.
Can I withdraw from NPS for a COVID-19 emergency?
Yes, the Pension Fund Regulatory Development Authority of India has allowed for partial withdrawal from NPS for the treatment expenses in case you, your spouse or children are COVID-19 positive. You need to submit a medical certificate and a formal request for withdrawal. You need to be part of NPS for at least three years, and you can withdraw not more than 25% of your total contribution.
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