NPS full form stands for National Pension Scheme. NPS is an initiative undertaken by the Government of India with the aim of providing retirement benefits to all the citizens of India. NPS seeks to inculcate the habit of saving for retirement amongst the citizens.
Here, we will cover the objectives of NPS, types of NPS accounts, interest rates and benefits. Before that, let us first understand the National Pension Scheme in brief.
Regulated and administered by the PFRDA or Pension Fund Regulatory and Development Authority under the PFRDA Act 2013, NPS is a defined, voluntary contribution scheme that is market-linked and managed by professional fund managers.
Under NPS, individual savings are pooled into a pension fund which is invested by PFRDA-regulated professional fund managers into diversified portfolios comprising Government Bonds, Bills, Corporate Debentures, and Shares.
Contributions made by individual subscribers to the National Pensions Scheme under the system are accumulated until retirement, and corpus growth continues via market-linked returns. Subscribers also have the option to exit this plan before retirement or opt for superannuation. However, this scheme ensures that a part of savings is utilized to provide a subscriber with retirement benefits.
Thus, on retirement, exit or superannuation, at least 40% of the contribution is utilized for the procurement of a lifetime pension via the purchase of an annuity. The remaining funds are paid to the subscriber in a lump sum.
Now that you know what is NPS scheme, let's understand its objectives-
Following are the key features of National Pension Scheme-
The National Pension System allows individuals to make systematic investments via either of the following two accounts.
NPS account opening is followed by the generation of a unique Permanent Retirement Account Number or PRAN issued to each subscriber. Fund management, including contribution to this scheme, is done via PRAN.
Thus, as per the National Pension System architecture, individuals can subscribe to the National Pensions Scheme with PFRDA -appointed intermediaries via the two accounts mentioned above.
These intermediaries can include –
Subscribers can opt for either of the following two investment options, thus providing the flexibility of choice.
It is available as a default option for subscribers as per the system. Fund investments under this option are managed automatically by an appointed fund manager as per an investor’s age profile.
Under this option, individuals are free to decide among available asset classes in which to invest their funds. Also, they can allocate different percentages of contributed funds to be invested in with a maximum cap of 50% for Asset Class E or Equities. Other Asset Classes include Class C, i.e., Corporate Debt Securities and Class G or Government Securities.
Alongside, subscribers also have an option to switch their investment options as well as change their fund manager. These options are, however, subject to certain constraints.
Another of NPS scheme benefits includes an option to withdraw their contributions partially. It gives individuals partial accessibility to their funds saved over the years, thus allowing them to meet financial needs before retirement during emergencies.
As per the rules regarding partial withdrawal, a subscriber can make withdrawals of their Tier I scheme contribution up to a maximum NPS Contribution limit of 25%.
Withdrawals are, however, subject to the following clauses.
An individual’s eligibility for the National Pension System depends on the various NPS models in operation. These are –
The pension system is applicable for government employees, both central and state, except for those employed with the armed forces.
Under this model, a contribution of 10% of a government employee’s salary goes to the National Pension System with an equal contribution by the government. Central Government employees receive a contribution of 14% from the government.
Also, all states in the country have implemented the NPS National Pension System , excluding the Government of West Bengal.
As per the corporate model, corporate employees enrolled by their employers can utilize the NPS benefits of the pension system. To do so, they must be Indian citizens between the age of 18 and 60 years, fulfilling the KYC requirements.
The model is applicable for entities as under.
All citizens of India meeting the following eligibility criteria can voluntarily opt for enrolment and contribute to the NPS pension scheme towards their retirement security.
Tier I and Tier II are the two primary account types under the NPS. The first is the default account, while the second is an optional addition. The table below provides a detailed explanation of the two account kinds.
Particulars
NPS Tier – 1 Account
NPS Tier – 2 Account
Status
Withdrawal
Tax Exemption
Until Rs.2 lakhs per annum
From Rs 1.5 lakh for government employees and none for others
Minimum Contribution
From ₹500 or ₹1000 per annum
Maximum Contribution
The interest rate on NPS is determined by the performance of the assets. As a result, the amount of return received upon retirement cannot be predicted in advance.
NPS is a market-linked product that allows you to invest in a variety of assets, such as stock, government debt, corporate debt, and alternative assets.
Once the asset mix and fund manager are determined, the money is invested in specific schemes that invest in these four asset classes.