What is NPS?

National Pension System, also known as NPS was introduced by the Indian government for voluntary contribution towards an individual's retirement fund as a plan to receive regular income as senior citizens.

The returns from these investments are market-linked. Investments are made in a mix of assets based on the age of the investor.

It is regulated by Pension Fund Regulatory and Development Authority (PFRDA). National Securities Depository Limited (NSDL) e-Governance Infrastructure Ltd. is its Central Recordkeeping Agency (CRA).

How does NPS work?

There are two types of accounts that you can open under NPS: Tier I and Tier II.

• Tier I account is a permanent retirement account that cannot be withdrawn without exit-load.
• Tier II account on the other hand, is more like an investment facility and can be withdrawn without any exit-load. However, it can only be opened if you have an active Tier I account.

How to open an NPS account?

• You need to open a Permanent Retirement Account (PRA) by filling the application form. It is available on www.npscra.nsdl.co.in (Link: Subscriber Corner > Forms > for Subscriber registration).
• Submit the application to your nearest Point Of Presence - Service Provider (POP-SP). Locate your nearest POP-SP at https://www.npscra.nsdl.co.in/pop-sp.php.
• Check the status of your application on https://cra-nsdl.com/CRA/ using your 17 digit receipt number.

You can open a Tier I and II account together using CSRF-1 form.

The same PRAN will continue to be, even if you change your job or residence.

Minimum contribution

First Contribution

• Tier I: Rs 500
• Tier II: Rs 1,000

Annual contribution

• Tier I: Rs 1,000
• Tier II: No requirement

Investment options

You have two investment approaches to choose from: Active and Auto. You can also choose your Pension Fund Managers (PFMs) from the list appointed by the PFRDA.

The asset classes in NPS are:

1. Equity (E): A 'high return-high risk' fund that invests predominantly in equity.
2. Corporate Debt (C): A 'medium return-medium risk' fund that invests predominantly in fixed income bearing instruments.
3. Government Securities (G): A 'low return-low risk' fund that invests purely in Government Securities.

In the 'Active' choice can design your own portfolio by allocation funds among asset classes E, C or G.

The 'Auto' choice distributes your investment based on your age. For example, for individuals below the age of 35 years, 50% of the funds are allocated in E and for those above the age of 55, 80% is allocated to G.

It makes sure that your younger years are 'High risk-high return' and older years are contributing towards low risk options.

Benefits of NPS

• You can claim exemption under Section 80CCD(1B) and 80 CCE. This exemption is only applicable on Tier I contribution.
• You have the option to plan the allocation of the funds invested and contribute as much as you wish.
• You can conveniently maintain your PRAN account even if you shift between corporate and government job.
• You can change you POP-SP. However, the POP-SP should be same for Tier I and Tier II accounts.

Withdrawal

• If you want to exit the NPS after 60 years of age, you will have to use at least 40% of your accumulated pension fund to purchase an annuity that would provide you a regular monthly pension. The remaining funds can be withdrawn as lump sum. 
• If you wish exit NPS before you turn 60, you will have to use at least 80% of your accumulated pension fund towards purchase of an annuity for a regular monthly pension The remaining funds can be withdrawn as lump sum; provided, you have stayed in NPS for at least 10 years.
• For partial withdrawal, your withdrawal amount cannot exceed 25% of the contributions made by you. Also, it can only have for specific reasons, and will be allowed a maximum of three times during the entire tenure of subscription with a gap of at least five years between two partial withdrawals.