Everything You Need to Know About National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored scheme launched in January 2004 for government employees. Under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government, this is a long-term retirement plan for individuals. It is a flexible scheme that allows you to contribute to the pension account of the government until your retirement. In addition, provides you with complete control over your financial future. Now the scheme is available to all citizens of India, but here the question is, can non-resident Indians also invest in this? Well, the answer is yes, NRIs are also eligible to invest in the NPS scheme. Want to know more about the National Pensions Scheme, its eligibility criteria, and benefits? Check out the given blog and get your answers.

What is the National Pension Scheme (NPS)?

As mentioned above, the National Pension Scheme was launched by the Indian government in 2004 for its employees to provide financial security after their retirement. However, since 2009, the scheme has been available to all citizens of India, whether they are private sector employees, self-employed individuals, or NRIs. In India, the NPS scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

It is a regular investment scheme where every year you need to contribute a certain amount till its maturity. Additionally, after its maturity, you get a fixed pension amount for your life that creates a regular income after your retirement. Considering that in the market there are no disruptions, from the scheme, based on the last 10 years' performance, you can expect the following annual returns:

• Scheme C (Corporate Bonds): Returns of 8-10% annually
• Scheme E (Equity): Depending on the condition of the market, returns of 12-15% annually
• Scheme G (Government Bonds): Returns 9-10% annually

Also, investing in NPS helps you to claim up to INR 1,50,000 tax deduction under section 80 of the Income Tax while filing income tax return if you choose the old tax regime. Apart from this, this scheme does offer the facility of partial withdrawal. However, for this, you need to fulfil the minimum lock-in period of 3 years.

NPS Vatsalya

The Indian government, under the Finance Act 2024, also introduced the NPS Vatsalya Scheme. Under this scheme, parents, on behalf of their minor children, can open an NPS account and every year or month can contribute a certain amount till the children turn 18. The minimum investment allowed in this scheme is INR 1,000 annually. Additionally, after the child turns 18, the NPS Vatsalya account automatically converts into an NPS account. Furthermore, non-resident Indians (NRIs) can also invest in this scheme.

This was all about the NPS Vatsalya and the NPS scheme. Moving further, let's know the eligibility criteria for this scheme.

National Pension Scheme Eligibility for Indians and NRIs

To invest in the National Pension Scheme, both Indian residents and NRIs need to fulfil some basic eligibility criteria. These include the following things:

• Should be a citizen of India, either an Indian resident or a non-resident Indian (NRI).
• Have an age between 18-60 years.
• According to the Indian Contract Act, for contract execution, you should be legally competent.
• NRIs need to have a valid bank account in India, i.e., Non-Resident External (NRE) Account, which is repatriable, or a Non-resident Ordinary (NRO) account, which is non-repatriable.
• Should fulfill the detailed Know Your Customer (KYC) norms mentioned in the application form.
• To open an NPS account, it is vital to have a valid PAN card.
• NRIs can open an NPS account under Tier I, while Indian residents can open an account under both Tier I and Tier II.
• NPS is an individual pension account; therefore, an individual cannot open this account on a third person's behalf.
• Hindu Undivided Family (HUFs), Overseas Citizen of India (OCI), and Persons of Indian Origin (PIOs) cannot open an NPS account.

These are some of the eligibility criteria that a person needs to fulfill to open an NPS account. Moving ahead, let's know how to log in to this account.

How to Log Into NPS Account?

There are two ways by which you can log into your NPS account. These are as follows:

• Using the KFintech Portal or the NSDL portal, you can simply log into your NPS account.
• You will be required to mention your user ID or password to log into your NPS account. Here, your user ID is your Permanent Retirement Account Number (PRAN).

This is how simply using your user ID and password, you can log into your NPS account. This process remains the same for both Indian residents and NRIs. Furthermore, let's know the features of the National Pension Scheme for both NRIs and Indian residents.

Features of National Pension Scheme (NPS)

For many individuals, whether it is Indian residents or NRIs, keeping their financial future safe after retirement, NPS is an attractive option. To provide high returns on investment, the NPS scheme consists of flexible allocation features of assets and investment objectives. Some of the key features of NPS for Indians and NRIs are as follows:

NPS Features for Indians

These are the following features of NPS for Indian residents:

Age Limit

Only individuals aged between 18 and 60 years can open an NPS account. Additionally, on behalf of minor children, their parents can open an NPS account and manage it till their children turn 18. After that, the children are eligible to manage their accounts on their own.

Returns

It has been over a decade since the scheme was launched, and so far, it has provided 11 to 12% annual returns to the participants. Although the scheme does not have a fixed interest rate, it has always provided better returns on investment in comparison to other tax-saving schemes.

Equity Allocation

The NPS offers two investment options, i.e., auto choice or active choice. In the auto choice, based on your age, the investment is risk-based- older investors receive lower-risk, more stable options. In the active choice, you get the option to choose the scheme and split your investment. At present, for the NPS on equity exposure, the cap ranges between 50 to 70%. However, for senior citizens and government employees, the cap range is 50%.

Flexibility

At any time in an accounting year, the NPS subscribers can add a certain amount to their NPS fund and change the subscription numbers. In addition, you can also opt for your investment options. In case you are not satisfied with the performance of your fund, you have the option to change your fund manager. Apart from this, you can manage your NPS account from anywhere and at any time, even when you relocate or change your employment, as the scheme is accessible in all locations and jobs.

NPS Features for NRIs

Here are the features of the National Pension Scheme for NRIs:

Travel Agnostic

Regardless of where a non-resident lives, as long as he/she is an Indian citizen, they can continue to enjoy the benefits of the NPS scheme. In simple terms, if you are an NRI, to constantly enjoy your NPS benefits, you need to maintain your NRI status while traveling in different countries.

Portfolio Management

By opting for the active mode option, as an NRI, you get ample flexibility to choose your asset allocation. In case you opt for auto mode, then your fund manager decides the allocation of your assets. In case of active mode, you get four options to make an investment and allocation percentage in each fund. These are as follows:

• Equity: Till 50% years of age, allocation of assets in stocks and related measures of listed companies in India, gradually at 60 years, 50% tapering.
• Government Securities: Investment made in Central and State Government Bonds.
• Corporate Debt: Asset allocation in Public Sector Units, Corporate Bonds, and Public Financial Institutions.
• Alternative Investment Funds: Allocation of assets in Infrastructure Investment Trusts (InvIT), Mortgage-Backed Securities (MBS), Real Estate Investment Trust (REIT), Commercial Mortgage-Backed Securities (CMBS), etc. However, in these funds, you can invest only 5% of your assets.

Liquidity

From the age of 60 years till you retire, the NPS is locked. However, till that time, you are allowed to make partial withdrawals to fulfill the fund's crunch. After an uninterrupted contribution for 10 years, you can withdraw up to 25% investment amount. However, between the two withdrawals, there should be a 5-year gap.

These are some of the key features of the National Pension Scheme for Indian residents and NRIs. Moving further, let's know the withdrawal rules for the NPS for Indians and NRIs.

Withdrawal Rules for National Pension Scheme

To balance your fund needs while securing a certain amount for your retirement, the NPS withdrawal rules are made. Whether you want to withdraw the amount at your retirement and require a partial amount for emergencies, understanding the rules and options can assist you in making the correct decisions. Furthermore, let's know the withdrawal rules for NPS for Indians.

For Indians

Here are the withdrawal rules for NPS for Indian residents:

Upon Superannuation

After retirement, an individual can withdraw up to 60% of the total investment as a lump amount, with the remaining 40% amount remaining in an annuity plan. While withdrawing your desired amount, you get the option to withdraw systematically at regular intervals, i.e., quarterly, monthly, half-yearly, or yearly. If the amount is INR 5,00,000 or less, you can withdraw the whole amount without choosing an annuity plan. Although your withdrawals are tax-free, annuities are subject to tax.

Pre-Mature Exit

In case of premature exit before turning 60 or reaching the superannuation age, a minimum of 80% of the pension amount should be used to buy an annuity. If the total investment amount is equal to or less than INR 2,50,000, the subscriber can choose a 100% lump-sum withdrawal.

Upon the Death of the Subscriber

Following the death of the subscriber, the complete accrued pension amount would be paid to the legal heir or nominee of the subscriber.

*Note: You can withdraw the whole amount in the NPS Tier II account without fulfilling any lock-in period.

For NRIs

As an NRI, if you want to end your investment under NPS, you first need to fill out a withdrawal application form and provide the requested documents to the Point of Presence (POP). After document verification, the POP will forward your application to CRA-NSDL. Then the CRA-NSDL will register your claim, and before settling your account, it will consult with NPS. Moreover, you can withdraw your invested account from the NPS in the following ways:

On Maturity

Upon turning 60, you can withdraw your 60% total investment amount, receiving complete control over your financial future. Additionally, the remaining 40% amount you need to invest in an annuity plan offered by a PFRDA-empanelled service provider. When you invest your remaining amount in an annuity, you receive regular payments, typically for retirement purposes. In case your total investment amount is INR 2,50,000 or less, you can withdraw your entire amount.

Premature Withdrawal

Due to unforeseen circumstances, you can end your NPS scheme prematurely after five years. In this scenario, you can withdraw up to 20% of your investment as an NRI, providing a safety net, and you should use the 80% amount to buy an annuity. If the investment amount is INR 2,50,000 or less, you can claim the whole amount without purchasing an annuity.

*Note: In case the NRI dies, the legal heir or nominee is eligible to receive the whole investment amount.

Paritial Withdrawal

You can withdraw up to 25% of your accumulated pension amount, which is partially your contributions. This withdrawal is applicable when you have made constant contributions since your date of joining in the last three years. In addition, during your entire subscription, you can withdraw the amount a maximum of three times. However, the withdrawal reasons should be as follows:

• For buying or constructing residential property (in certain cases)
• Marriage of children
• Higher studies of children
• For the medical treatment of critical illness

These are the NPS withdrawal rules and types for NRIs and Indian residents. Only by following these can you end your NPS investment. Moving ahead, let's know the types of NPS.

Types of National Pension Scheme

The National Pension Scheme accounts are of two types, i.e., Tier I NPS Account and Tier II NPS Account. Let's know about them in detail.

Tier I NPS Account

If you wish to join the National Pension Scheme, it is mandatory to open a Tier I NPS account. In this account, the withdrawals are conditional and restricted. It primarily concentrates on retirement. Therefore, after the completion of three years, you can partially withdraw the amount. With a minimum contribution of Rs. 500, you can open this account. Additionally, to keep the Tier I NPS account active each year, Indian residents need to deposit a minimum of Rs. 1,000, and an NRI needs to deposit Rs. 6000.

Tier II NPS Account

This account is optional to open and is available to Indian residents; therefore, NRIs cannot open this account. You can withdraw your amount anytime from the Tier II NPS account. With a minimum contribution of Rs 1,000, you can open this account. Unlike a Tier I NPS account, this account does not require an annual deposit to remain active. The funds deposited in these accounts are a type of withdrawable savings and can be used during an emergency withdrawal. Additionally, to open this account, a resident Indian needs to first open a Tier I NPS account.

These are the different types of NPS accounts. Moving further, let's know the tax benefits of a Tier I NPS account under section 80CCD of the Income Tax Act.

Tax Benefits of Tier I National Pension Scheme Account Under Section 80CCD for Indian Residents

Here is the list of tax benefits under section 80CCD, Indian residents can claim for Tier I National Pension Scheme Account:

Tax Benefits for Self-Contribution

Under section 80CCD of the Income Tax Act, 1961, employees can claim the following tax benefits who contribute to the NPS account:

• Under section 80CCD(1), 10% of salary tax deduction (including basic and Dearness Allowance (DA)) to a maximum of INR 1,50,000 under section 80CCE.
• Under section 80CCD(1B), a maximum tax deduction of INR 50,000 along with a limit of INR 1,50,000 under section 80CCE.

*Note: One cannot claim these tax deductions under the new tax regime.

Tax Benefits on Employer Contributions

Employer can claim the following tax deduction for their contribution to the NPS account:

• Tax deduction of up to 10% of salary can be claimed under section 80CCD(2) by the employer, for his/her contribution to the NPS account. In case of a new tax regime, it can be 14%.
• If the employer works under the central government, irrespective of the chosen tax regime, they claim a tax deduction of 14% of their salary.

Tax Benefits for Self-Employed People

Self-employed people who invest in NPS can claim the following tax benefits:

• Under section 80CCD(1), they can receive up to 20% tax deduction on their total earned income, subject to a maximum of INR 1,50,000 under section 80CCE.
• Under section 80CCD(1B), INR 50,000 tax deduction along with the maximum limit of INR 1,50,000 under section 80CCE.

*Note: Under the new tax regime, these tax deductions are not available in NPS.

Tax Benefits on Withdrawal

These are the tax benefits under the NPS scheme that you can claim during withdrawal:

• Partial Withdrawal: Under section 10(12B), subject to the criteria and circumstances stated by PFRDA, when the self-contribution amount is up to 25%, a partial withdrawal made under NPS is eligible for tax exemption.
• Lump Sum Withdrawal: Upon reaching superannuation or turning 60, a lump sum withdrawal of 60% of accrued funds in NPS, one can claim tax exemption under section 10.

Tax Benefits on Purchase of Annuity

Under section 80CCD(5), tax exemption is provided on the purchase of annuity or superannuation at 60 years. However, under section 80CCD(3), from annuity, a subsequent income is taxed.

These are the tax benefits Indian residents receive on a Tier I NPS account under section 80CCD. Moving further, let's know the tax benefits that Tier I National Pension Scheme Account NRIs receive under section 80CCD.

Tax Benefits of Tier I National Pension Scheme Account Under Section 80CCD for NRIs

Do you know that apart from providing a secure financial future, NPS also helps NRIs in claiming several tax benefits? Want to know what they are? Read the points below and get your answers.

• By investing in NPS, NRIs can claim up to INR 1,50,000 tax exemption from their taxable income in India. Under section 80CCD(1), this tax deduction is allowed to them. Additionally, it also includes the tax exemption limit of Section 80C.
• Apart from this, under section 80CCD, NRIs can also claim an additional tax exemption for their investment in the NPS. In this, they get up to INR 50,000 tax deduction in addition to the tax exemption provided under section 80CCD (1).
• When the National Pension Scheme matures, NRIs are eligible to withdraw up to 60% of their total investment in a lump sum. Here, the lump sum withdrawal is stated as commutation, and the commuted amount of the pension is not taxed in their hands.

Hence, through the NPS scheme, with tax benefits, NRIs build their retirement amount. Furthermore, after the maturity of the scheme 40% of the uncommuted amount provides lifelong pensions to the NRIs, i.e., a regular source of income after retirement.

These are the tax benefits NRIs receive under section 80CCD after opening a Tier I National Pension Scheme Account. Moving ahead, let's know the tax benefit of a Tier II National Pension Scheme Account under Section 80C.

Tax Benefits of Tier II National Pension Scheme Account Under Section 80C

As mentioned above, a Tier II National Pension Scheme Account is only available to Indian residents. Considering this, the benefits will also be available to them. Moving further, let's know a few perks of opening this account.

• It is an optional account available to Tier I Indian resident account holders.
• Under section 80C of the Income Tax Act, 1961, one can claim a tax deduction for the contribution made under this account.
• To claim a tax deduction, you need first to complete a three-year lock-in period.
• Under section 80C, subject to the combined limit of the threshold, you can claim a maximum of INR 1,50,000 tax deduction.

These are the benefits that you can get while opening a Tier II National Pension Scheme account under section 80C. However, these tax deduction benefits are not available under the new tax regime. To gain all these perks of NPS, you need to open an NPS account. Want to know how you can do so? Read the next section and get your answers.

Process to Open NPS Account Online

Making an investment in the National Pension Scheme by the Indian residents and NRIs can be done either by opening an account using the NPS website or through any Indian bank that provides the NPS facility. Although the process of opening an NPS account remains the same for both NRIs and Indian residents but it is slightly different. So, let's first know the steps to open an NPS account online for Indian residents.

How Indian Residents Can Open an NPS Account Online?

Follow the steps below to open an account online using the website:

• Go to the official government website of eNPS, generally managed by Protean eGov Technologies Limited.
• On reaching, click on 'National Pension System' and then on the 'Registration' option. As per your convenience, choose the registration method, either by PAN card or Aadhaar card.
• A page will open where, in the 'status of applicant' field, you need to select your residential status, i.e., Indian resident. Fill in the requested details such as personal information, nominee, and bank details.
• Upload the documents stated on the website, such as copies of your PAN card, signature, and photograph.
• Make the initial payment online, which is generally INR 500 for a Tier I NPS account and INR 1000 for a Tier II NPS account.
• Once all the things are successfully done, you will get your Permanent Retirement Account Number (PRAN), which is your unique NPS number.
• Last, to manage your NPS account online, create a password and use it whenever you need.

How NRIs Can Open an NPS Account Online?

Here is how NRIs can open an NPS account online:

• Go to the official website of eNPS and click on 'National Pension System.'
• Then, from the 'status of applicant field', choose your residential status as a non-resident Indian.
• For registration on the site, you need to mention your PAN number. So, under the 'register with' option, choose the Permanent Account Number and mention your card details.
• After that, you need to provide the bank details of your NRE or NRO account, PAN card number, passport number, and your bank. Apart from this, also provide the name of the country you are currently residing in.
• Then, click on continue and mention your investment details and choose the scheme and your pension fund manager.
• Now, upload the request documents on the side along with your photograph and signature.
• Fill out the application form and print it. Then, within 90 days of your registration, send the form to the Central Recordkeeping Agency. It is vital to do so to avoid freezing your NPS account.

This is how using the NPS website, Indian residents and NRIs can open an account online.

Final Thoughts

Hence, if the above-mentioned benefits match your investment goals and risk profile, consider investing in the National Pension Scheme (NPS). The scheme allows both NRIs and Indian resident to build up a certain amount for their retirement with tax-saving benefits. Here, the blog was all about the NPS scheme hope that after reading it, you get a proper understanding of what the scheme is about and how it benefits individuals. Furthermore, if you still have confusion or want to know more in detail, contact Savetaxs. We are a team of professionals with years of experience in the tax field that can assist you in providing proper guidance about it and help you in investing in this scheme.