Eligibility, Features, and Contribution Rules for an NPS Account

When you are focused on building careers, managing everyday expenses and juggling family responsibilities, retirement may not seem something that you need to prioritise at the moment. But the truth is, not planning for retirement today may lead to some harsh financial realities in the future. No steady income, dependence on others, healthcare stress, etc., are only a few out of the many struggles you may be facing without a retirement plan in place. Note that the goal here is not to scare you away but to ensure retirement readiness as early as possible. 

One way to invest in your retirement is through the National Pension System (NPS). Here, we talk about the NPS account, the features, eligibility and contribution rules.

What is NPS?

NPS is a market-linked investment scheme that allows you to build a pension corpus. The way it works is that you contribute to NPS during your working years. At retirement (usually at 60 years old), you can withdraw up to 60% of the corpus as a lump sum from your NPS account. The remaining 40% is used to buy an annuity plan that gives you a monthly income (pension).

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013.

Key Features of NPS

Here are the prominent features of NPS:

• Low-Cost: In terms of cost, NPS is one of the most affordable pension schemes in the world.
• Flexibility: You can decide how much you want to invest and which assets you’d prefer to invest in.
• Portability: You can operate and contribute to your NPS account from anywhere in India, across jobs, cities and employers.  
• Tax Benefits: NPS Contributions are subject to tax benefits. Plus, the lump sum amount (at withdrawal) remains tax-free.
• Market-Linked: There is a potential to earn optimum returns since this investment vehicle is linked to market conditions.

Eligibility 

You can start an NPS account if you fulfil the following requirements:

• Age: Between 18 and 70 years old
• Nationality: Indian citizen (resident or non-resident) and Overseas Citizen of India (OCI)

Note that Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) cannot open an NPS account. 

Contributions & Allocations 

NPS is structured into two types of accounts (Tier 1 and Tier 2), and contributions will differ for each type:

1. Based on Account Type

• Tier 1 Account

This is a permanent retirement account in which you can contribute regularly. The money is invested according to the scheme/fund manager that you choose.

• Minimum contribution to open Tier 1 Account:  ₹500/-
• Minimum contribution per year: ₹1,000/-

• Tier 2 Account

You need a Tier 1 account in order to open a Tier 2 account. Here, voluntary withdrawal is allowed (a feature not available in Tier 1 accounts). 

• Minimum contribution to open Tier 2 Account:  ₹250/-
• Minimum contribution per year: No restrictions

1. Based on Asset Class

You can invest in four asset classes from which you need to specify the allocation under a single Pension Fund Manager (PFM). PFMs are financial entities registered with PFRDA which manage the money in your NPS account. Asset classes include

Here’s how much you’re allowed to allocate to these asset classes:

• Percentage contribution value cannot exceed 5% for Alternative Investment Funds
• The total allocation across all four asset classes must be equal to 100%.
• For a Tier 2 account, you can allocate 100% to equity.
• For a Tier 1 account, you can allocate 75% to equity.

1. Based on Active Choice Vs. Auto Choice

• Active Choice: Under active choice, you can choose how you’d like to invest. You can choose the asset allocation percentage as well as the PFM. Here’s the maximum allocation percentage:

Note that only Tier 1 account holders can invest in Asset Class A.

• Auto Choice: NPS offers a Life-cycle (Auto Choice) investment option, where your fund allocation across Equity, Corporate Debt, and Government Securities adjusts automatically with age. As you grow older, exposure to riskier assets like Equity decreases. Based on your risk appetite, you can choose from four options:
  • LC75 – Aggressive Life Cycle Fund
  • LC50 – Moderate Life cycle fund
  • LC25 – Conservative Life cycle fund
  • Balanced Life Cycle Fund (BLC)

How to Open an NPS Account?

You can open an NPS account through a Point of Presence (PoP) registered with PFRDA via online and offline modes. Alternatively, you can use the eNPS portal to open an account online.

Is NPS Enough for a Retirement Corpus?

While NPS is one of the most powerful retirement tools, it also comes with market risks and certain withdrawal restrictions. Another long-term investment vehicle to consider is a Public Provident Fund (PPF). The tenure of a PPF account is 15 years, and contributions qualify for tax benefits. Here, the returns are assured since they are not market-linked. The interest rate remains fixed throughout the tenure of your PPF account. You can use a Public Provident Fund calculator to estimate your returns. Diversifying your investments with stable options like PPF can lead to a more balanced and resilient retirement corpus.

Final Thoughts

Retirement may not always be easy, especially when it comes to money. NPS is easy to open, has the potential to offer good returns and makes you retirement-ready.