What is NPS (National Pension System) and How NPS Works

The National Pension System (NPS) is a popular government-backed scheme that helps individuals grow their savings during their working years. You can save money for your retirement years by choosing NPS, which, in turn, invests your money in stocks, government bonds, or corporate debt and can help you build a corpus over time.

You can also save money on taxes with NPS. You can claim deductions under Section 80C and an additional deduction under Section 80CCD(1B). NPS is an easy and efficient way to prepare for a stable financial future, regardless of whether you are salaried or self-employed. 

The voluntary scheme enables you to contribute towards retirement throughout your working life regularly. Let us have a look at what this scheme is and how it works.

What is NPS (National Pension System)

NPS is a reliable government program that assures the investors that their money will increase over time during their employment years. While the programme was only launched for government employees initially in 2009, it opened for all the sections including the NRIs.

After subscribing to NPS online or offline, one can regularly contribute to this pension account during their working life. After retirement 60% of the deposited amount can be withdrawn in a lump sum. The remaining 40% is used for purchasing an annuity from a life insurance company to earn a regular pension.

Invest Now

How does NPS (National Pension System) Work

The money you deposit in your NPS account is invested by the fund managers regulated by the PFRDA. The investment is mostly made in diversified portfolios that consist of government bonds, company debentures, and shares.

As the investment is made in market-linked securities, the returns or the rate of interest offered by NPS varies as per the market conditions.

How to Open NPS Account

Looking to open an NPS account, here is a guide to help you:

NPS helps individuals save for retirement by allowing monthly contributions to their account. Upon retirement, 60% of the accumulated amount can be withdrawn, while the remaining 40% is used to purchase an annuity, providing regular income. NPS has two categories: Tier I (non-withdrawable) and Tier II (flexible withdrawals).

Online Process to Open NPS Account

1. Initiate Your Application: Begin by visiting the NPS official website and locating the "Apply Now" button.
2. Select Your Recordkeeping Agency: Opt for a Central Recordkeeping Agency (CRA) such as NSDL to handle your NPS account.
3. Complete the Online Form: Fill out the online form with all the required personal and financial information accurately.
4. Receive Your Acknowledgement ID: After submitting the form, an Acknowledgement ID will be generated, confirming your registration.
5. Finalise Registration Within 15 Days: It's important to finalise your registration within 15 days by using the provided Acknowledgement ID.

Open NPS Account through the iMobile app

1. Log in to your account on the iMobile app.

2. Click the "Invest" section, find the “NPS” feature and click ‘Invest now’.

3. Fill in all the required details, such as your investment amount, personal information, and nominee details.

4. Now, upload your photo and signature.

5. After verifying the information, submit your application through the app.

Open NPS Account through ICICI Bank Net Banking

1. Log in to your Net Banking Account using your credentials.

2. Find the section “Investments and Insurance”.

3. Next, click “National Pension System”.

4. Fill in your investment amount, personal information, and nominee details.

5. Next, upload your photo and signature.

6. Confirm the details and click “Submit”.

Offline Process to Open NPS Account

Submit your KYC documents to a registered branch to start an offline NPS account with ICICI Bank. Pay the initial contribution, complete the NPS registration form, and submit it with your KYC documents. The bank will handle your request and open your NPS account after verification.

NPS Account KYC Verification Process

Bank Account Details Verification: Your KYC will be verified using the details provided in your bank account.

• UIDAI Verification: KYC details will be cross-checked with UIDAI records also, to ensure accuracy and security.
• Provide Additional Details: Input additional information such as bank details, preferred scheme options, and nominee details as part of the registration process.
• Upload Required Documents: Upload essential documents like a recent photograph, signature, canceled cheque, bank statement/passbook, and PAN card copy for authentication purposes.
• Make Initial Contribution: Kickstart your NPS account by making an initial contribution of at least Rs. 500.
• Complete Payment Process: Finalize the payment process through net banking or a secure payment gateway.
• Receive PRAN and PDF Form: Upon successful registration, you will receive your 12-digit PRAN and a PDF form via registered email and SMS.
• Confirmation of Registration: To conclude the registration process, complete the confirmation step through e-sign or OTP verification to avoid physically submitting the registration form.

Ensure a seamless and hassle-free process to open your NPS account by following the steps detailed above and start planning for retirement.

How to Login to your NPS Account

If you are new to logging in, you will need to create a password. Here's what to do:

1. Go to the NSDL NPS official portal.
2. Click on the "Login with PRAN/IPIN" button.
3. You will land on the login screen.
4. Hit the "Reset Password" link to make a new one.
5. Enter your PRAN, Date of Birth, new password, confirm new password and enter captcha.
6. Click "Submit".
7. You will get an OTP on your registered phone.
8. Enter the OTP to confirm your new password.
9. Now, you are all set to log in to your E-NPS account with your PRAN and the fresh password.

These steps make setting up your account easy, ensuring you can access your NPS info securely.

What is the user ID for NPS login?

Your IPIN is the password for accessing your NPS account online, and your PRAN is your user ID. To ensure security, your IPIN should be 8 to 14 characters long and must be alphanumeric, including at least one special character like #, $, or &. This combination helps keep your account safe from unauthorised access.

Always remember to create a strong, unique password that you can remember easily but others cannot guess. Regularly updating your IPIN can also enhance your account's security.

Who can open NPS Account?

Any citizen of India between the age of 18-60 years can open an account. This account is not compulsory for government of India employees who have joined before Jan 2004. However, for such individuals, it is voluntary.

Types of NPS Account

Subscribers are allowed to open two types of NPS account – Tier 1 and Tier II. However, you can only open Tier II account if you already have a Tier I account. The two major differences between the two are the tax benefits and withdrawal limitations. While there are certain withdrawal limitations in Tier I account, Tier II account does not enjoy the same tax benefits as Tier I.

NPS Scheme Tier 1 Account

• This type of account is mandatory for NPS subscribers

• Government employees have to contribute 10 percent of their basic salary plus DA to this NPS account. The government makes an equal contribution

• For non-government employees, they have to open an account with a minimum of INR 500 and they have to contribute a minimum of INR 6000 every year

• For private sector employees, an option between an NPS and Employee Provident Fund (EPF) is given. If you go for NPS, you will have to make a contribution of about 10 percent of your basic salary plus DA. The employer will make an equal contribution. Keep in mind that the employer contribution is not taxable and comes under the Section 80 CCD2 on form 16 document

NPS Scheme Tier 2 Account

• The Tier 2 account is a non-mandatory account for NPS subscribers

• This is a type of NPS - all citizen model from which you can make withdrawals at any time

• Further, no contributions will be made by the government or the employer in this account

• No tax exemptions are available for investment into NPS through the Tier 2 account

• To open a Tier 2 account you would need a minimum of INR 1000 and a minimum contribution amount of INR 250

• Minimum account balance on Tier 2 accounts have to be INR 2000 at the end of each year

• The treatment of returns from Tier 2 accounts is the same as Mutual Funds

Features and Benefits of NPS Account

Here are the key features of NPS that need to be noted when investing:

1. Contribution Flexibility: NPS offers the freedom to contribute as per your financial situation and preferences. Whether you prefer regular contributions or occasional deposits, NPS adapts to your needs.
2. Investment Variety: You can invest in equities, bonds, and government assets through NPS. It's similar to having a menu of options to suit your comfort level and investment style.
3. Tax Benefits: By allowing you to deduct your contributions under Section 80C, NPS helps you reduce your tax liability. Moreover, NPS offers tax advantages for both withdrawals and annuity payments, making it a tax-effective way to save for retirement.
4. Portability Across Employment: If you change employment or locales, your NPS account remains with you, guaranteeing consistency in your retirement savings path.
5. Customised Management: With NPS, you can choose from multiple possibilities for your pension fund management. Every manager has a different strategy, so you can select the one that best fits your investing objectives.
6. Convenient Online Access: NPS offers an easy-to-use online interface which lets you track investments, keep an eye on your account, and make changes from the comfort of your home. 
7. Steady Income After Retirement: NPS ensures you have a regular income once you retire so you can relax and enjoy your golden years.
8. Grow Your Savings with Market Opportunities: Your NPS investments have the potential to grow alongside the market, helping you build a bigger retirement fund.
9. Keep Your Benefits With Job Switch: Your NPS account remains with you whether you switch jobs or change cities.
10. Build Your Dream Retirement: By saving regularly and making informed decisions, NPS helps you build a solid retirement fund, bringing you closer to your retirement dreams.

All of these features create NPS, a flexible and easy retirement savings plan which helps people successfully prepare for and handle their post-retirement money.

Tax benefit of NPS Scheme

As per the current tax provisions, NPS subscribers can get an additional tax benefit of up to Rs. 50,000 in a financial year under Section 80CCD (1B). This NPS tax benefit is over and above the tax-saving benefit of up to Rs. 1.5 lakh that it receives under Section 80CCE. However, you only get tax benefits on the contribution made towards Tier I account. Tier II account currently enjoys no tax exemption on contribution. However, as per recent announcements made by Finance Minister of India, Tier II accounts with 3-year lock-in will also soon enjoy tax benefits.

NPS Minimum Contribution and Service Charge

Any Indian citizen, between the age of 18-60 years can subscribe to NPS. The minimum contribution amount in a financial year is Rs. 1000 for a Tier I account. There is no minimum contribution amount for Tier II account, but you have to maintain a minimum balance of Rs 2000 in your Tier II account at the end of each financial year. The investment in both these accounts earns compound interest to help you earn high returns.

As per the NPS details, subscribers are also required to pay a service charge for their investment. For public sector employees, the service charge is 0.0102%. The same for private sector employees is 0.25%.

NPS Interest Rate

A popular investment plan that is appreciated by many working people in India is the National Pension Scheme (NPS). It is helpful to remember that the NPS interest rate is dependent on the asset's performance.

It is impossible to predict the ultimate returns in advance in order to comprehend how NPS functions for interest rates. Since NPS is a market-linked investment plan, its performance depends on the performance of corporate debt, government debt, equity, and alternative assets.

How is NPS Calculated

The formula to calculate NPS is:

A = P (1 + r/n) ^ nt

Here, P represents the Principal Sum, A is the Amount, r stands for the Rate of interest, n denotes the instances of interest compounding, and t is the number of years.

For salaried employees, your contribution and your employer’s contribution to the NPS scheme are considered. If you contribute 10% of your salary monthly to NPS, your employer will match this amount. To estimate your future pension, you can use the NPS calculator.

NPS returns depend on the performance of underlying assets like equity, corporate bonds, government securities, and alternative assets. Fund managers allocate your investments across these assets.

Market conditions impact their value, making NPS returns upon retirement variable and somewhat unpredictable. However, analysing past performance can provide an estimate of expected returns.

Faqs

What is Scheme E and Scheme G in NPS?

The ICICI Bank NPS Scheme E invests in equities, offering higher returns but with market risks, which is ideal for growth-oriented investors. Scheme G invests in government securities, providing safer, stable returns which are suitable for risk-averse individuals prioritising capital preservation. Both cater to different investment goals.

DISCLAIMER

The contents of this document are meant merely for information purposes. The information contained herein is subject to updation, completion, revision, verification and amendment and the same may change materially. Read More