What Is NPS (National Pension System) And How Does It Work?

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Retirement is a distant dream for our generation, no doubt. We may have to work most of our lives, but that doesn’t mean the NPS pension plan isn’t for us. With inflation on a steady rise, we’re going to need another source of income in our evening years. But hey, I don’t mean to sound so grim. I actually want to break down how the National Pension Scheme works, and for good reason. Even if you’re nowhere near retirement, there’s a whole bunch of tax-saving it can do for you. Read on:

The National Pension Scheme is an effective tool that not only helps reduce investment risk but also offers guaranteed returns. The benefits offered by this government-initiated scheme brings in many pleasant surprises. So, read on to know all about the NPS pension plan, which is way more than just a pension plan. Before you dive in, bookmark this NPS calculator for future use.

What is an NPS Account? 

National Pension Scheme is a government scheme intended to benefit various Indians who wish to have a secured and regular income even after retirement. Would you believe if I say you can earn up to 12% returns on a secure investment? Well, if you are unaware, you may doubt it, but that's exactly what India’s National Pension Scheme has to offer. 

In 2004, NPS was first launched for government employees only, but in 2009, the scheme was declared open for all. NPS is a voluntary investment plan that any citizen of India between the ages of 18 to 65 can choose to invest in. Under the Pension Fund Regulatory and Development Authority, government-approved Pension Fund Managers play a key role in managing your investments. There are four asset classes where your money gets invested. After maturity, you can enjoy a stable income and meet your financial needs and goals. 

The exciting deals of the National Pension Plan are divided into two different accounts under NPS. These are known as Tier 1 and Tier 2 accounts. 

  • Tier 1 Account NPS 

Tier 1 account is the primary account that you have to open when planning to invest in the National Pension Plan. With a nominal contribution of ₹500 at the time of account opening, you can easily open a Tier 1 account and become a member of the NPS family. 

Some of the striking features of this account are-

  1. Individuals can withdraw a maximum of 60% of investments made to this account upon maturity
  2. The remaining 40% investment of this account has to be used for purchasing annuities that can bring a regular monthly income for the account holder
  3. Tier 1 account matures when the account holder reaches the age of 60 years. On certain grounds, the Tier 1 account holder can request for a lump sum withdrawal of Tier 1 account investment
  4. Tier 1 is the gateway to the Tier 2 account
  • Tier 2 Account NPS

A Tier 2 account of the NPS Pension Plan is just like the school’s second grade. In order to get into second grade, you first need to clear your 1st grade. Similarly, to open a Tier 2 account, you must have a Tier 1 account. You need to make a minimum contribution of ₹1,000 while opening the account.

Given below are some important features of the NPS tier 2 Account: 

  1. The account holder of a Tier 2 account can withdraw money anytime as per their wish
  2. Within three days of your money withdrawal request, you can get the money in your account
  3. There is no cap on the number of withdrawals you can make

Am I Eligible for the National Pension Scheme India? 

Probably the second-best question after “What is the NPS pension plan?”. The eligibility for National Pension Scheme India is not a tough nut to crack. This is another reason why a majority of investors appreciate this investment plan, and it has been a preferred choice for millions of Indians. 

Before we dive into more details, let's have a quick look at the eligibility criteria for NPS Pension Plan. 

Tier 1 NPS 

Tier 2 NPS

Individuals falling within the age bar of 18 to 65 years are eligible to apply

Individuals with a Tier 1 account are automatically eligible for Tier 2 account

To continue Tier 1 account, you must invest at least once every year

You may or may not wish to make annual contributions in Tier 2 account to keep it active

Indians can apply

Indians can apply

Should I Invest In NPS Pension Plan?

One question that may pop into your mind even if you fulfil the basic criteria is whether NPS investment is worth it? Well, to be fair, it differs for each person. But wait, here are some key points to tilt you in favour.

Working without a pension?

People working in the private sector or unorganised sector may not receive any pension scheme from their organisation. This is where you might need a steady flow of income post-retirement

Fluctuating market - Not your cup of tea?

If you are someone who wishes to abstain from participating in the unbelievable highs and unfortunate lows of the stock market, relying on the NPS pension plan can be a great deal for you. Simply put, this is a low-risk investment plan.

Not ready for commitments

Not only people with a low-risk appetite, but even the ones who have a keen interest in not-too-rigid investment plans can also opt for this scheme. Who would not like to have an investment plan that does not ask for bounded commitments and is ready to offer assured returns?

Save on Taxes

Investments are not always only intended for money-making. They are also a profitable way of saving on taxes. If you don't have enough sources to save on tax, National Pension Scheme is what you can look forward to.

First step of the ladder

NPS Pension Plan can also act as the first step in your investment journey. As a beginner, you may be looking for a safe plan that also helps you build a habit of systematic savings, and NPS can be a good option in that case too.

How does NPS Pension Plan Work? 

No fixed commitments and no hefty contribution; how will the NPS Pension Plan benefit me? How can I make a profit when I am not bound to make a dedicated investment? Here's the answer to your query-

National Pension Plan gives you four broad options to invest in like-

  • Equity
  • Corporate Debt
  • Government Securities
  • Alternative Investment Funds

Given that you have four options to invest in, how will you decide which one is beneficial as per your risk appetite, age, and other related factors? For this, you have two options to choose from to start your investment-

  • Active Choice

Under National Pension Scheme India, you have the freedom to be your own portfolio designer for NPS investment. Here, you will be deciding how much you want to invest in these four investment options. As per your choice, you can choose a fund manager and allocate your investment. 

  • Auto Choice

While the active choice may sound quite exciting as you get to design your portfolio. But wait, have you also stressed about the time it can consume? It is a good option for interested people, but for those who do not have enough knowledge or time to decide on their portfolio.

NPS Pension Plan provides you with the option of auto choice where you can leave the burden of managing your portfolio to the Pension Fund Managers, who will carefully look into your details and invest as per the best deals. 

Once you have your PRAN (Permanent Retirement Account Number) with you, you can also log in to the official website of the National Pension Scheme India and manage your account within a few clicks. PRAN is a unique number that every NPS account holder is allotted at the time of Tier 1 account opening. This hassle-free feature further makes it a simple yet interesting investment option. 

Does the NPS Pension Plan give me an edge over Other Investments: Benefits of NPS

The thought of investing in SIPs or the intraday trade may sound quite a profitable choice, especially when you hear about the colossal profits made by the investors. But that might not be an ideal choice when you are planning your post-retirement income. Why? 

In general, with age, the risk appetite reduces, and so does your time span and investment capacity. When building a pension, you cannot rely on short-term and highly volatile market-influenced investment plans. This is where you may want to resort to something safer and more stable like the NPS Pension Plan. 

Here are a few benefits of having an NPS account that is too big to ignore-

  • Low Risk: This low-risk generating investment plan is also quite secure as it is aided by the government of India
  • Flexible contributions: You need not make a fixed contribution every month. Invest when you can and how much you want.
  • Expert Managers: The feature of Pension Fund Manager gives you an edge over other investment plans because the fund managers rightly and profitably manage your funds.
  • Manage your Portfolio: The choice to manage your portfolio on your own is yet another flexibility given to the customers.
  • Easy to Maintain: PFRDA regulates NPS and executes the investment rules and norms associated with National Pension Scheme India. Low maintenance cost, high returns, and huge flexibility are the benefits you get to enjoy.
  • Easy access to your account: Customers can easily manage or view their NPS account by logging in to the official website of the National Pension Plan

What Documents will I Need for an NPS Pension Plan?

If you have reached this section of the blog, you might already be thinking of investing in the NPS Pension Plan. If so, there are a few documents you must take note of before beginning the registration process, as paperwork plays a crucial role when investing. 

Proof of Address

  • A copy of depository account
  • Electricity bill
  • Driving License 
  • Aadhar Card 
  • Employment ID card
  • PAN Card
  • School-leaving Certificate 
  • Water Bill 

Proof of Identity

  • Aadhar Card
  • PAN Card
  • Driving License
  • School-leaving Certificate
  • Employment ID card

Scanned copy of the following

  • PAN
  • Signature 
  • Photograph
  • Proof of Date of Birth
  • Photographs
  • A Cancelled Cheque

When applying online, remember keeping your documents in jpeg, .pdf, png, or jpg format.

How do I Open an Account for a National Pension Plan? 

Opening an NPS Pension Plan account is as simple as it is investing in NPS. There are two ways in which you can open your National Pension Plan account, offline and online. As per your convenience and preference, you may choose either of the option-

  • Online Application Process NPS
  • Visit the official website of the eNPS
  • Go to the 'National Pension System' as provided on the right-hand side on the page
  • Here you need to first register yourself 
  • Click on New Registration to begin the registration process
  • Enter the details as asked like applicant type, applicant status, registration mode, type of account etc. 
  • Now click on the 'Generate OTP' option
  • Now you will be presented with a registration form
  • Duly fill the registration form by entering correct details like nominee, bank details, contact information, etc. 
  • The registration process will complete once 
  • Acknowledgement ID is generated
  • Registration details are submitted 
  • PRAN generated, and
  • OTP authenticated 
  • After all this, you need to make the payment for account opening as well as KYC charges
  • You can now log in to your account
  • Offline Application Process NPS

The offline application process is always open for you if you wish to go by this traditional method. Do not forget to take the documents with you, so you don't have to rush at the 11th hour to get a few documents. The offline registration process is as follows-

  • You need to visit your nearest Point Of Presence Service Provider, commonly known as POP-SP. It refers to the service providers who are offering NPS services
  • Collect an NPS registration form 
  • Fill the form correctly and do not forget to re-check the details
  • Submit the form by attaching the required documents
  • Your POP will provide you PRAN and the password that you can use to log in to your eNPS account
  • Pay the account opening contribution and the KYC charges

Keep these things in mind before you Invest in NPS Pension Plan

Every investment plan is subject to a certain amount of market fluctuations and to this, NPS Pension Plan is not an exception. Though the effect of market fluctuations on NPS is quite low as compared to other investment plans, there are a few things you must know about when you are planning for investment in NPS, like-

  • A Replacement for Earlier pension Plans

National Pension Scheme India is a substitution for the earlier pension plans that existed for government employees in India. So, you may find it lagging in terms of profit when compared to the old pension plans. 

  • Withdrawals May Be Limited

When it comes to a Tier 1 account, you cannot withdraw any amount until it matures. Only under certain conditions lump-sum withdrawal is allowed, like-

  • Children's marriage
  • Children's higher education
  • Treatment of critical illness
  • Construction of property (if only you have no other property) 

However, to make a partial withdrawal of a Tier 1 account, the account must be at least 10 years old. Also, you only have three chances of partial withdrawal in a Tier 1 account. 

  • Taxation On Maturity Withdrawal 

As per the norms of the National Pension Scheme India, individuals can withdraw 60% of the investment upon maturity, and the rest 40% is used for the purchase of the annuity. So, the 60% withdrawal is subject to tax charges. Although the remaining 40% is not taxable, the income on annuity purchases is taxable. 

  • One Person One PRAN

One individual can have only one NPS account. So, this means one PRAN per person. 

  • Cap On investment

The National Pension Plan also has limits on the amount of investment one can make. This limit has been set in order to safeguard other financial requirements that an individual may have. Considering all such factors, the NPS norm says an individual cannot spend more than 50% of their income in an NPS account. 

  • Market Does Affect ROI of NPS

Under the National Pension Plan, individuals get four investment options (equity, government securities, corporate bonds, and alternative investment funds). This ROI is subject to market fluctuations. So, in case the market is badly hit, your returns on NPS can also be affected. 

Summing it up

In order to grow your money, you must choose to invest in the right plan. NPS Pension Plan is undoubtedly one such option to consider. Before you begin your investment plan, it is always advised to know each detail of the investment plan and the provider. Ensure you leave no policy page unturned to avoid misunderstanding regarding the National Pension Scheme. Gather all the necessary details regarding NPS and start making post-retirement financial goals today. 

FAQs

  • Is NPS a good investment?

National Pension Scheme India is one of the most popular, safe, and high-return investment plans. In order to get a stable income even after retirement, one can choose to invest in NPS. Also, there are no major eligibility criteria for NPS investment. Any individual above 18 years and below 60 years of age can apply. 

  • What is the National Pension System?

The National Pension System India is a government scheme that lets Indians invest for a regular income after retirement. There are two types of accounts provided under NPS, and people can choose to invest as per their interest and earn a stable income after retirement. 

  • Who can join NPS?

Any Indian who is above the age of 18 years can apply for NPS. The maximum age limit for NPS registration is 60 years. 

  • Is it worth investing in NPS?

Considering the fact that the National Pension Plan involves low risk, organised norms and government rules, good returns, and flexibility of account management, it can be considered worth investing in. Like every other investment, NPS too includes some level of market risk but because it is backed by the government of India, such risks are quite low. 

  • What is the difference between NPS and PPF?

In simpler terms, NPS is a pension-specific scheme while PPF is not pension-specific. In the table given below, you can get a clear idea of the difference between PPF and NPS. 

National Pension Scheme (NPS) 

Public Provident Fund (PPF) 

It is specially designed for the purpose of pension

It is not a pension-specific plan

The lock-in period of NPS is 60 years of age of the account holder 

The lock-in period of PPF is 15 years 

Partial withdrawal is possible after 10 years of account opening 

Partial withdrawal is possible after 6 years of account opening

National Pension Plan does not have a fixed return

PPF has a fixed rate of interest

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