What is National Pension Scheme (NPS)?

National Pension Scheme (NPS) is government-sponsored pension scheme, was launched in January 2004. It is voluntary and long term investment plan for retirement. The scheme was initially designed for government employees only, later it was opened up for all the citizens of India between the age of 18 to 60 in 2009 which includes self-employed professionals and others in the unorganized sector on a voluntary basis. One can contribute regularly in pension account during his/her working life, withdraw a part of corpus in a lump-sum and use the remaining corpus to buy an annuity to secure a regular income after retirement. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement. NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement.

On December 2018, Government of India made NPS an entirely tax-free instrument in India where entire corpus escapes tax at maturity, the 40% annuity also becomes tax-free.
NPS offers a range of investment options and choice of Pension Fund Manager (PFM) for planning the growth of investment in a reasonable manner. Individuals can switch from one investment option to another or from one fund manager to another. The returns are totally market related. Currently, you can select from the following available funds:
• ICICI Prudential Pension Fund Management Co. Ltd.
• HDFC Pension Management Co. Ltd.
• Kotak Mahindra Pension Fund Ltd.
• LIC Pension Fund Ltd.
• Reliance Capital Pension Fund Ltd.
• SBI Pension Funds Pvt. Ltd
• UTI Retirement Solutions Ltd
• Birla Sunlife Pension Management Limited

NPS account can be opened online via eNPS as well as offline process. For offline process, one has to visit Point of Presence (POP). Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime.
NPS is structured into following two tiers,
1. Tier I: The primary account which is a pension account which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts.
2. Tier II: In order to introduce some liquidity to the scheme, subscribers with pre-existing Tier I accounts can deposit and withdrawn money as and when they want. This is an investment account similar to Mutual Fund.
The contribution to saving account can only be made by subscriber and not by any third party.Who can join?The NPS is a good scheme for anyone who wants to plan for their retirement early and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private sector jobs. A systematic investment like this can make a major difference to your life post-retirement. In fact, salaried people who wants to make the most of the 80C deductions can also consider this scheme.
The citizen of India whether resident or non-resident can join NPS with following conditions.
• The subscriber should be between 18 to 60 years old as the date of submission of his/her application to Point of Presence.
• The subscriber should comply with the Know your Customer (KYC) norms as detailed in the subscriber registration form.

Benefits

A portion of the NPS goes to equities (may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF. In NPS you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.
Risk
Under the national Pension Scheme, a subscriber can create a retirement corpus and also enjoy tax benefits up to 1.5 lakh under Section 80C and additionally up to 50,000 under Section 80CCD (1B) of the Income Tax Act. The scheme, therefore, allows a tax deduction of up to total Rs 2 lakh.
It is now possible to move funds from a recognized Employees Provident Fund (EPF) to the National Pension Scheme (NPS).

Withdrawal

After 60 years: You cannot withdraw the entire corpus of the NPS scheme after your retirement. It is compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free now.
Early Withdrawal and Exit: As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least 3 years, you may withdraw up to 25% for certain purposes like children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal for up to 3 times (with a gap of 5 years) in the entire tenure. These restrictions are only imposed on tier I accounts and not on tier II accounts.

Comparison with other Tax Saving Instruments

Apart from the NPS, there are other popular tax-saving investment options under Section 80C like Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD).
Investment Interest Lock-in period Risk Profile
NPS 8% to 10% (expected) Till retirement Market-related risks
ELSS 12% to 15% (expected) 3 years Market-related risks
PPF 8.1% (guaranteed) 15 years Risk-free
FD 7% to 9% (guaranteed) 5 years Risk-free