NPS (National Pension System) - Features, Benefits and Drawbacks

NPS (National Pension System) - Features, Tax Benefits and Drawbacks

NPS (National Pension System) - Features, Tax Benefits and Drawbacks
NPS (National Pension System) - Features, Tax Benefits and Drawbacks
The National Pension Scheme (NPS) is a Government-sponsored pension scheme launched in 2004. Since 2009, it was only available for government employees. But later, it was made available for every resident of India. The entire process of NPS is regulated by the PFRDA (Pension Fund Regulatory and Development Authority) under the Parliamentary Act of India.

One can not work for his/ her entire lifespan. We need to plan for that time when we will not be able to work actively. It's quite important to figure out the expenses for that time when active income sources get reduced. If you are thinking of that time, you are planning your retirement. That's great. Retirement planning from an early age is a great idea. There are plenty of retirement tools available in India. The National Pension System is one of them and a Government-sponsored retirement scheme. You can invest in NPS (National Pension System) as the NPS is a comprehensive investment tool for retirement. 

What is the NPS (National Pension System)?

National Pension System (NPS) is a market-linked multi-tier based savings cum pension scheme sponsored by the Government of India. NPS initially launched in 2004 for the only Govt. Employees. But later in 2009, NPS opened for all. The National Pension System is regulated by the PFRDA (Pension Fund Regulatory and Development Authority) under the Indian Parliament act. There are two schemes Tier1 and Tier 2. 

The NPS scheme permits the subscriber contribution until the age of 60. On completion of the age of 60, an NPS account gets matured. On maturity, the subscriber is free to withdraw a maximum of 60% of the corpus as lumpsum. The rest of the amount will be applicable to buy an annuity plan to get future pensions. 

Any Indian resident can open an NPS account. On successful account opening, NPS subscribers greeted with a 12-digit PRAN (Permanent Retirement Account Number)  number and a physical PRAN card.

Types of NPS accounts 

Tier 1 - The Mandatory Tier

  • Tier 1 is the primary type of an NPS account.
  • The lock-in phase of the Tier 1 NPS account is the age of 60.
  • Investment in Tier 1 gets a tax benefit under section 80 CCD. The lump-sum withdrawal from Tier 1 on maturity gets exempted from tax.
  • Premature partial withdrawal of up to 25% of investment is allowed in NPS Tier-1. 

Tier 2 - The Optional Tier

  • Tier-2 is a voluntary savings account. 
  • Tier-2 account type is only allowed if the subscriber has the Tier-1.
  • No such tax benefits for regular NPS subscribers are available in the NPS Tier-2 account. However, Gov. employees can get a tax benefit up to 1.5 lakh under section 80C per year with 3-years of lock-in.
  • Tier-2 subscribers can withdraw any amount of funds anytime, like a regular savings bank account.
  • Transfer funds from Tier-2 to Tier-1 is allowed.
  • NPS Tier-2 account can be closed anytime with a small procedure.

NPS Asset Classes

NPS bears four specified asset classes (Equity, Corporate debt, Government Bonds, and Alternative Investment Funds) from which the allocation will specify in a single PFM. Here is the list of asset classes under the National Pension System (NPS):

  • Asset class E for Equity and related instruments
  • Asset class C for Corporate debt and related instruments 
  • Asset class G for State and Central Government Bonds 
  • Asset class A for Alternative Investment Funds like CMBS (Commercial Mortgage-Backed Securities), MBS (Mortgage-Backed Securities), REITS (Real Estate Investment Trust), Invlts (Infrastructure Investment trusts), etc.

Pension Fund Managers (PFM)

At the time of registration with CRA (Central Record Keeping Agency), an NPS subscriber needs to be selected as Pension Fund Managers (PFM).  

The National Pension System provides us several types of selected PFMs, allocation choices such as Active Choice and Auto Choice, and four asset classes such as E for Equity, C for Corporate Debt, G for Government Bond, and A for Alternative Investment Funds. 

PFM choosing is mandatory for subscribers. Eight fund managers can help you to get the best return from NPS:  

  1. Birla Sun Life Pension Fund Ltd  
  2. HDFC Pension Management Co. Ltd  
  3. ICICI Prudential Pension fund Management Ltd  
  4. Kotak Mahindra Pension Funds Ltd  
  5. LIC Pension Fund Ltd  
  6. Reliance Capital Pension Fund Ltd  
  7. SBI Pension Fund Pvt. Ltd  
  8. UTI Retirement Solutions Ltd. 

NPS Asset Allocations Options

Under NPS an individual can choose either Active Choice or Auto choice. Let’s discuss one by one:

Active Choice 

The Active Choice option offers subscribers to choose a fund manager for different specific asset classes. You can also set a single PFM for all asset classes. With Active Choice, the subscriber is free to set the allocation percentages for each asset class. Here are some points regarding Active Choice under NPS asset allocation:

  • The subscriber can select one or more asset classes under a single Pension Fund Manager (PFM). 
  • Up to 50 years of age the subscriber can select a maximum of 75% for E (Equity) of the total asset allocation. 
  • In asset class A (Alternative Investment Funds), the percentage of contribution value cannot cross greater than 5%. 
  • The total allocation of these four asset classes must be equal to 100%. 

Here is the NPS Equity Allocation Matrix for Active choice: 

Age (years)  Max. equity allocation 
Up to 50  75% 
51  72.50%
52  70% 
53  67.50%
54  65% 
55  62.50% 
56  60% 
57  57.50% 
58  55% 
59  52.50% 
60 & above  50% 

Auto Choice 

This kind of allocation choice is ideal if the subscriber does not have sufficient knowledge about PFMs and asset allocations. The Auto Choice is also perfect for those who do not like taking extra headaches. 

In Auto Choice, the fund gets automatically allocated under different asset classes depending on your age bracket. As you grow older, the equity (E) exposure decreases, and allocation under Government Securities (G) increases. That makes your investment less volatile.

According to the tendency of taking a risk, you can select any of the following options:

  • Auto Choice - Aggressive (High Risk)
  • Auto Choice - Moderate (Medium Risk)
  • Auto Choice - Conservative (Low Risk). 

Here is the NPS Equity Allocation Matrix for Auto choice: 

    Aggressive Life Cycle Fund (LC75)      Moderate Life Cycle Fund (LC50)      Conservative Life Cycle Fund (LC25)   
Age (years) E % C % G % E % C % G % E % C % G %
Up to 35  75 10 15 50 30 20 25 45 30
36 71 11 18 48 29 23 24 43 33
37 67 12 21 46 28 26 23 41 36
38 63 13 24 44 27 29 22 39 39
39 59 14 28 42 26 32 21 37 42
40 55 15 30 40 25 35 20 35 45
41 51 16 33 38 24 38 19 33 48
42 47 17 36 36 23 41 18 31 51
43 43 18 39 34 22 44 17 29 54
44 39 19 42 32 21 47 16 27 57
45 35 20 45 30 20 50 15 25 60
46 32 20 48 28 19 53 14 23 63
47 29 20 51 26 18 56 13 21 66
48 26 20 54 24 17 59 12 19 69
49 23 20 57 22 16 62 11 17 72
50 20 20 60 20 15 65 10 15 75
51 19 18 63 18 14 68 9 13 78
52 18 16 66 16 13 71 8 11 81
53 17 14 69 14 12 74 7 9 84
54 16 12 72 12 11 77 6 7 87
55 15 10 75 10 10 80 5 5 90

National Pension System (NPS) - Eligibility Criteria

  • All resident of India is eligible to open account between the ages of 18 to 65 years  
  • There are no restrictions for NRI (Non-resident of India) to open an NPS account   
  • Government employees are allowed under this scheme 
  • Non-government employees and self-employed are also eligible 

Investment limits under NPS

When opening an NPS account, you must know about the types of NPS: 

Tier I 

  • This is like a pension scheme. First, should open the Tier 1 account. To maintain this account, follow some restrictions: 
  • Minimum amount per Contribution: Rs 500 
  • Minimum contribution per FY: Rs 1000 
  • Minimum number of contributions per year: 1 

Tier II 

  • This is like an investment scheme. An individual can not open a Tier II account without opening a Tier I account. Let’s see the investment limitations: 
  • Minimum amount per contribution: 250 
  • Minimum balance: Not required 

NPS - TAX Benefits

National Pension System (NPS) is under Exempt Exempt Exempt (EEE) in Tax saving instrument. Simply say that an individual can claim tax benefit under Sec 80 CCD (1), 80 CCD (1B), and also 80 CCD (2). Tax benefits are only applicable for the Tier I account only and no tax benefits applied in Tier-II account. 

Under Sec 80 CCD (1) 

  • Government employees and self-employed people under this section get the benefit of tax exemption with an overall ceiling of Rs. 1.5 lakh under Sec 80 CCE. 
  • If you are a Govt. employee, can get exempt from tax up to 1.5 lakh. But, the discount shall not exceed the equivalent of 10 percent of the basic salary. 
  • Or, a self-employed person can also get a maximum limit of 10 percent tax rebate of gross income. 

Under Sec 80 CCD (1B) 

  • Section 80 CCD (1B) allows all of NPS subscribers to make additional tax deductions on investment up to Rs 50, 000. 

Under Sec 80 CCD (2) 

  • The additional tax benefits are only applied for corporate sectors. 

Tax Benefits on Partial Withdrawal

  • A subscriber is able to partially withdraw the invested amount from the NPS account before completing the age of 60 years. Up to 25% of his/her contributions are exempt from tax.  

Tax Benefit on Annuity Purchase

  • The amount of money that you have invested in annuity purchases is completely exempt from tax. However, the annuity income is taxable from the next year of investment. 

Tax Benefits on Lump-sum Withdrawal

  • After attaining the age of 60 years or above, the subscriber can withdraw up to 40% of the total invested corpus that is exempt from tax. For example, if you have 10 lakhs, then after attaining the age of 60 can withdraw a maximum of 4 lakhs (40%) that is totally tax-free. At the retirement time if you withdraw 40% and the remaining 60% for annuity purchase that is exempt from tax. But the annuity income is not under tax-exempt.  

Rules of Partial withdrawal under NPS Tier - 1

  • NPS subscribers are allowed to make a partial withdrawal with only the following conditions: 
    • Children's higher education 
    • Children marriage 
    • Critical illness
    • Skill development and for starting a business.  
  • Partial withdrawal is only allowed after completion of three years from the opening date of the NPS account. 
  • The NPS subscriber can withdraw up to 25% of his/ her investment. 
  • The partial withdrawal process is settled by the authority only 3 times. 

Premature Exit and Withdrawal Rules

After opening this account one can exit prematurely. But only after 10 years, he/she can take away 20% of the accumulated corpus. And the rest 80% amount can be paid as pension or annuity. 

Read: NPS Withdrawal Rules - Premature Exit Rules

NPS Pension Calculator

The calculation of the pension of an NPS account is not so simple. A lot of factors are there. Most importantly, the return is not consistent at all. Additionally, there are multiple asset classes, and their returns are also different. Below, I am giving some sample investments and their corresponding expected pensions that will help you to estimate your investment under NPS. Alternatively, you can use our NPS Calculator tool which will help you to quickly calculate the approx return of NPS.

Contribution/m. Return * Tenure (Yrs) Corpus * Annuity* Lumpsum * Pension *
Rs. 2,500.00 10% 30 57 Lakh 40% 34 Lakh Rs. 12,346.00 P/m
Rs. 4,000.00 10% 30 91 Lakh 40% 54 Lakh Rs. 19,754.00 P/m
Rs. 5,000.00 10% 30 1.1 Crore 40% 68 Lakh Rs. 24,693.00 P/m
Rs. 7,500.00 10% 30 1.7 Crore 40% 1 Crore Rs. 37,039.00 P/m
Rs. 10,000.00 10% 30 2.2 Crore 40% 1.3 Crore Rs. 49,345.00 P/m
Rs. 15,000.00 10% 30 3.4 Crore 40% 2 Crore Rs. 74,078.00 P/m
Rs. 20,000.00 10% 30 4.5 Crore 40% 2.7 Crore Rs. 98,771.00 P/m

* The above table, figures & calculations are only indicative. Fees, maintenance & other charges not included while calculation. The considered rate of annuity is 6.5%. 

How to open an NPS Account

Opening an NPS Account is easy. You can open NPS either offline or online mode. Let's discuss one by one.

Offline Mode

To open an NPS account offline, you need to submit the application form along with KYC details to any nearest NPS POP (Point of Presence). You can visit to find your nearest NPS Point of Presence offices. Most Banks offer the NPS account opening facility. Alternatively, you can approach a bank for the same. Once you applied, you will receive a physical kit containing your PRAN card and other documents within a few weeks.

Online Mode

Online mode is the most preferred option that offers a complete paperless NPS account facility. It is a quick and convenient option for those who have a shortage of time. If your mobile number is linked with AADHAAR, you can go with this option. You can visit the eNPS portal to open an NPS account. In this case, you will receive your 12-Digit Permanent Retirement Account Number (PRAN) instantly after the successful completion of the online application. You will also receive the physical PRAN kit within a few weeks.

Benefits of NPS 

No doubt, NPS is a great investment tool for retirements that carries certain benefits. As of my thought, I like NPS for the following reasons:

A Compact Investment Tool

NPS offers investment in Equity, Debt, Gov. Securities, and even Real-Estate with customization. I think NPS is suitable for those who are not able to handle multiple investments. 

Long-Term Investment Tenure

If you invest in NPS, you have to hold it till your age of 60. Yes, the time horizon is very long, but you have to remember NPS is a retirement plan. Holding investments for a long time can grow your money drastically. 

Scope for Diversification

Four asset classes under NPS are Class-E, Class-C, Class-G, and Class-A. According to your risk-taking capability, you can create your customized portfolio.  

Low Management Cost

The management cost under NPS is also attractive. The management fee is 0.01 percent of your investment. Such as, on investment 1 lakh, your management fee will be Rs. 10 only.

TAX Saving Opportunity

If you are a taxpayer, you can save a tax up to 2 lakh per financial year by investing under NPS. Contributions towards NPS Tier-1 is eligible for a tax rebate of 1.5 lakh under section 80CCD (1). On claiming 80CCD (1), you have another tax-saving opportunity of 50 thousand with 80CCD (1B).

Easy to Manage

I found NPS is easy to manage. You can manage your NPS account online. You can also change PFM, asset allocation by yourself. All you need to do this visit the eNPS portal and create an account over there.

Some Drawbacks of NPS

Although NPS is a good investment plan, there are still some reasons why people may not go with NPS. 

The Long Lock-in Period

As per PFRDA-NPS regulations, an NPS subscriber can only buy an annuity plan at the age of 60. The age of 60 may not be ideal for everyone. It would be better if the subscribers, other than Government Employees, can buy the annuity on demand.

No Special annuity plan for NPS

As of now, there is no such special annuity-plan available for NPS. The presence of some exclusive annuity plan with some more rate of interest could have been attractive.

Premature withdrawal with too many conditions

One can partially withdraw with a lot of conditions. As NPS is a long-term scheme, the facility of easy partial withdrawal, just like PF, will be more beneficial.

Chance of Capital Loss

NPS consists of Equity exposure. A subscriber must allocate a part to equity. Due to this, there is a chance of loss of capital due to stock-market volatility. However, keeping equity for a long time reduces the possibility of capital loss.


Can a subscriber make contributions in his/her NPS account before receipt of the PRAN card? 

No, PRAN is required. 

Is it permissible for NRIs to save through the National Pension System? 

Yes, an NRI is permitted. 

Can I open multiple NPS accounts? 

No, you can open only one account in NPS.

Can I join both APY and NPS?

As per PFRDA, there are no restrictions on having both APY and NPS account of an Individual.

Can I open an NPS account jointly with my spouse, child, and relative, etc? 

No, Under NPS accounts can only be opened in individual mode.

Is it possible to create a SIP for NPS? 

Yes, in October 2020, PFRDA launched the D-Remit service for NPS customers. This service allows subscribers to set up SIPs for automatic contributions to NPS accounts.

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