The National Pension System (NPS) is a government-backed retirement savings scheme in India aimed at providing financial security to individuals after retirement. It is a flexible and efficient tool for building a corpus for your golden years while enjoying tax benefits. Here's a detailed breakdown of NPS, including its account types, funding requirements, maturity options, and pension benefits.
---
Types of NPS Accounts: Tier 1 and Tier 2
NPS offers two types of accounts:
1. Tier 1 Account:
Purpose: This is the primary retirement account and comes with tax-saving benefits.
Lock-in Period: The account has a mandatory lock-in period until the subscriber reaches the age of 60.
Withdrawal Rules: Limited withdrawal options are allowed before maturity, such as for emergencies like education, marriage, or critical illnesses.
2. Tier 2 Account:
Purpose: This is a voluntary savings account without the stringent withdrawal rules of Tier 1.
Flexibility: You can deposit and withdraw funds at any time, making it an ideal savings account.
Tax Benefits: Unlike Tier 1, it does not offer tax benefits (except for government employees under specific conditions).
---
How to Open an NPS Account
Opening an NPS account is simple and can be done both online and offline. Here's how:
1. Offline Process:
Visit any authorized Point of Presence (POP) such as banks or post offices.
Fill out the registration form and provide KYC documents (identity proof, address proof, and PAN card).
Submit a minimum initial contribution of ₹500 for Tier 1 or ₹1,000 for Tier 2.
2. Online Process (via eNPS):
Visit the official NPS website (https://enps.nsdl.com).
Register using your PAN, Aadhaar, or mobile number linked with your bank account.
Upload scanned copies of KYC documents and make an initial contribution using net banking or UPI.
---
Minimum and Maximum Contributions
Tier 1 Account:
Minimum Contribution: ₹500 per transaction or ₹1,000 annually.
Maximum Contribution: No upper limit.
Tier 2 Account:
Minimum Contribution: ₹250 per transaction.
Maximum Contribution: No upper limit.
---
Maturity Date
The maturity date for an NPS account is linked to the subscriber’s retirement age, which is 60 years by default. However, you can extend the account until the age of 70 by submitting a request.
---
Options at Maturity
Upon maturity, NPS offers several options for utilizing your accumulated corpus:
1. Annuity Purchase:
A minimum of 40% of the corpus must be used to purchase an annuity (a monthly pension).
The remaining 60% can be withdrawn as a lump sum, which is tax-free.
2. Full Withdrawal:
If the corpus is less than ₹5 lakhs, you can withdraw the entire amount without purchasing an annuity.
3. Deferred Withdrawal:
Subscribers can defer their lump sum withdrawal until the age of 70 while continuing to earn returns on the investments.
---
Pension Options After Maturity
When choosing an annuity plan for receiving a pension, you can customize it based on your family’s financial needs. The available options are:
1. Pension for the Account Holder Only:
The annuity is paid to the account holder until their death.
After death, no further payments are made, and the annuity stops.
2. Pension for the Account Holder and Spouse:
The annuity is paid to the account holder during their lifetime.
After their death, the spouse continues to receive the pension.
3. Pension with Return of Corpus:
The annuity is paid to the account holder and, after their death, to the spouse.
After the spouse’s death, the remaining corpus is passed on to the legal heirs or children.
---
Key Benefits of NPS
Tax Savings:
Tier 1 contributions are eligible for tax deductions up to ₹1.5 lakhs under Section 80C.
An additional ₹50,000 deduction is available under Section 80CCD(1B).
Flexibility:
You can choose your fund manager and investment mix (equity, corporate bonds, government securities) based on your risk appetite.
Low-Cost Structure:
NPS is one of the lowest-cost retirement products, ensuring more savings are invested in the market.