National Pension Scheme (NPS) | Tier 1 and Tier 2 | Apply eNPS Online
India’s Central Government started a contribution scheme back in 2004 on January 1. The scheme became known as National Pension Scheme. As the name suggests, the scheme was designed to help people accumulate a retirement corpus. However, the scheme came with several objectives:
- The individuals could decide where exactly their retirement investments went.
- Reduction of Indian Government liabilities with respect to pension payouts.
- Ensuring that central government employees still manage to get a sizable income post retirement.
- Ensuring that the investors get good returns from their investments.
There were some restrictions to the original NPS. The restrictions included:
- None other than new central government employees could participate.
- People belonging to armed forces were not allowed to participate in NPS.
The National Pension Scheme received a major overhaul my early 2009 and then by mid-2009, yet another major overhaul was made to make the scheme available to every single Indian citizen provided they belong to the age-group of 18 to 60.
Under NPS every new subscriber was provided with what is known as Unique PRAN or Permanent Retirement Account Number. Once a person subscribes, he or she gets two different accounts, which are Tier I account and Tier II account.
The question here is, what are these two different accounts?
Well, since a single subscriber gets both accounts, he or she gets access to the accounts anytime they want. However, there are some rules for using those accounts. Here are the rules:
- Tier I accountis a sealed savings account with no outflow options. This means withdrawals from this account are completely off limits and the only thing the subscriber can do here is to save and check out the amount of savings until retirement.
- Tier II account is just a savings account where inflows and outflows are allowed. This means, one can invest and then withdraw whenever needed.
Amendments to NPS
The changes that were made:
- As mentioned earlier, 2009 saw a few amendments. In fact, they were major overhauls. First change that was made was that instead of the condition of just central government employees, any state government employee was allowed to make investments in NPS.
- After that, in May 2009, yet another change was made and this time, all Indian citizens were included. This meant that irrespective of a person employed in a government job (central or state) or a private job, he or she can open NPS account.
Apart from the aforementioned amendments, a few more important changes were made in terms of the accounts that are allowed under NPS.
The changes include:
- For Tier I account it became mandatory for every single government employee to invest a minimum of 10% of whatever salary they earn. Failure to do so would mean that Tier I account will become inactive.
- For a person to have Tier II account, he or she needs to have an active Tier I account.
- A third type of account came into existence known as the Swavalamban Account designed for economically weaker sections of the society. In this account, the Indian government would contribute INR 1000 a year for 4 years in a row so that the people belonging to economically weaker sections get encouragement for saving under NPS.
“This amended NPS or National Pension Scheme is often known as New Pension Scheme.”
Differences Between National Pension Scheme (or Old NPS) and New Pension Scheme (or New NPS)
Let us take a quick look at the differences between the old and the new schemes:
|Parameters for Difference||Under the Old Scheme||Under the New Scheme|
|Employees’ Contribution||10% of basic pay, special pay and various allowances taken together. Here, dearness allowance is not included.||10% of basic pay, special pay, various allowances plus dearness allowance taken together.|
|Bank’s Contribution||Exact same contribution as that of the employee except that the two contributions go in two different accounts.||Exact same contribution as the employee and both contributions (that is collective contribution) goes in the same account.|
|Additional Contribution by Employees||If an employee wanted to stop contributing, he or she had to give a notice one month ahead of the date from which he or she wanted to stop contribution.||In case of new scheme, an employee is free to contribute and withdraw at will. No notifications are required even in case a person wants to stop contribution.|
|Fund Management||The P.F. Trust was responsible for fund management.||6 fund managers have been appointed by PFRDA for fund management under this new scheme.|
|Regulation||No regulatory body existed.||PFRDA is the authorized regulator.|
|Charges||There were no additional charges whatsoever.||There may be additional charges and some fees that the investors need to absorb.|
The NPS-Lite or Swavalamban Pension Yojana
Swavalamban Pension Yojana was actually an addition to the NPS. This addition came after the May 2009 amendments. Also known by the name NPS-Lite, the Swavalamban Yojana is more of a standalone pension scheme rather than being a mere addition to existing NPS.
This scheme included servicing organizations that were referred to as Aggregators. The role of the Aggregators was to provide services to different groups of people. The primary jobs of the Aggregators included:
- Helping individuals in a group to register for Swavalamban Yojana.
- Transferring pension money from the registered members to proper accounts.
- Maintenance of pension accounts for the registered members.
As before, it was essential that people participating in the NPS-Lite belonged to the age group of 18 and 60.
The key feature of Swavalamban Pension Yojana were:
- If a person opened an account in fiscal year 2010-2011, the government of India would make a year contribution of INR 1000 for first 4 years.
As of today, the NPS-Lite of Swavalamban Pension Yojana has been replaced by Atal Pension Yojana.
National Pension Scheme – Eligibility Criteria You Should Know
NPS or the National Pension Scheme is designed for every Indian citizen, even if that person is an NRI. However, this does not mean that the NPS has no eligibility criteria in place. There are in fact certain important criteria that one should fulfill in order to participate in NPS. These are mentioned below:
|Eligible If||No Eligible If|
|Is minimum 18-years old when applying||The person is insane, i.e. has some mental illness|
|Is not over 60-years old when applying||The person already holds NPS account|
|KYC documents are provided as per guidelines in the application form||The person is undischarged insolvent|
CRA – Key Component of NPS
Many articles that you find online about NPS will not tell about CRA or Central Record Keeping Agency. The CRA was not existent before but later, NSDL e-Governance Infrastructure Limited and PFRDA together decided to set up the CRA and made it one of the key components for proper functioning of National Pension Scheme.
After CRA was formed, a mandate was released according to which, a government employee will have to open CRA account. Once the CRA account for an employee is created, Unique PRAN is assigned to that account.
Once the CRA was formed, it was assigned a host of important duties. The most important of these duties include:
- Rendering recordkeeping and administration services to every subscriber of NPS.
- Making sure that PRAN is assigned to every individual subscriber of NPS.
- Cross-verifying PRAN issuance to subscribers against database.
- Keep detailed record of all transactions associated with each unique PRAN.
- Acting as a communication interface between PFRDA and NPS intermediaries.
- Tracking individual contributions for all subscribers and relaying information and instructions about pension funds to subscribers every day.
- Ensuring that subscribers get statements against their PRAN.
Which Indians are Allowed to Participate in NPS?
We have already mentioned this but let us take a look at the same in more details:
- Indians who are a minimum of 18 years of age and a maximum of 60 years of age can participate in NPS.
- Employees of Central Autonomous Bodies and Central Government who joined into service on or after Jan 1, 2004.
- Employees of State Autonomous Bodies and State Governments who joined into service on or after the date on which NPS notification was issued.
- Corporates are also allowed to participate in NPS. They have the ability to select pension fund manager. This allows investment flexibility. Corporates can enjoy the benefit of determining how much fund they want to be allocated in which class of assets.
- If a person is from unorganized sector or if he or she is employed as a part-time employee for central or state government can go for NPS-Lite or Swavalamban Yojana provided they are not already covered by any of the Social Security Schemes mentioned below:
- 1948 – Coal Mines Provident Fund and Miscellaneous Provisions Act.
- 1952 – Employees’ Provident Fund and miscellaneous Provisions Act.
- 1955 – Assam Tea Plantations Provident Fund and Pension Fund Scheme Act.
- 1961 – Jammu and Kashmir Employees’ Provident Fund Act.
- 1966 – Seamen’s Provident Fund Act.
National Pension Scheme Salient Features:
- Low-cost investment with transparency. Subscribers get to choose fund scheme of their choice and can keep a tab on performance on a daily basis.
- Simple application process where the account is opened through a nodal office of a certain area and PRAN is allocated for every subscriber.
- Since PRAN is unique, it works as a unique identifier irrespective of the subscriber’s location across the nation.
- NPS details can be easily accessed online.
- Subscribers of NPS can actually choose their fund manager, provider of customer service and even the funds where they want their money to be allocated.
- Subscribers have the option to change fund manager as well as investment funds anytime they wish.
- Subscribers even have the ability to change the investment frequency and duration whenever they wish to.
- Fund management charges are extremely low, making it one of the most low-cost investment options available in market.
National Pension Scheme Benefits at a Glance:
- NPS is all about voluntary participation and every Indian is eligible provide age restrictions are satisfied.
- NPS comes with the freedom of deciding on the investment amount.
- Super easy application procedure makes NPS subscription hassle-free.
- NPS allows the flexibility of choosing fund managers and funds to invest in to its subscribers.
- NPS account can be accessed online, thereby effectively removing demographic restrictions.
- NPS follows very stringent standards as dictated by PFRDA. Performance evaluation takes place routinely.
- Tax deductions of up to 1 lakh rupees u/s 80CCC and 80CCD can be availed with investments in NPS.
- Tax deductions on central government contributions can be availed u/s 80CCD (2).
However, one needs to remember that the aforementioned tax benefits are valid only and only if subscribers have Tier I accounts.
Pension Calculations Under NPS
Before discussing this in details, there are two important things one needs know:
- There is no such thing called predetermined rate at which money grows.
- Subscribers do not get the pension payments directly.
So, how the hell does it work? Nice question! Here is the answer:
- Regular investments are to be made in NPS scheme.
- Investments from subscribers are then invested by the scheme in the market. This keeps happening until the investor or the subscriber attains 60 years of age.
- When the subscriber hits the age of 60, he or she receives the money, which again has to be reinvested so that the accumulated corpus can now generate money income stream as monthly pension payout.
Now, there is another big question – how much pension can one expect?
This is difficult to say. The pension amount will actually differ from one subscriber to another. Why so? Because there are several factors that will determine the amount of pension one receives. These factors are summed up below:
- Risk profile selected by the subscriber. More risks more gains – that’s pure economics!
- Fund manager chosen by a subscriber. Not all fund managers perform well and manage to get best returns from investments.
Is it wise to use NPS calculators found online?
They aren’t accurate. Remember that the NPS calculators that can be found online are actually based on known parameters and they total ignore the unknown variables. These calculators make use of 4 parameters:
- Investment amount
- Investment frequency
- Interest rate prevalent in market
- Duration of investment
If you note, factors like user’s choice of fund manager, fund manager’s past history, user’s choice of risk profile etc. are completely ignored. So, even though these calculators give a numerical figure, the actual outcome may be dramatically different.
Also, you need to know that there is not fixed interest rate. Because NPS allows investment in a wide range of funds, interest rates vary from one fund to another. These variations come from a number of other factors which are beyond human control. However, if we take time-series analysis of previously earned interests, we can safely assume that the interest earnings will be anywhere between 12 and 14 percent. However, this can change depending on current economic scenario.
Applicable Fees and Charges on NPS Investments
For all Tier I accounts, there are no fees and charges for the subscribers. In other words, subscribers don’t need to pay any fees and charges. Anything that is to be paid is paid by the employer of the subscriber.
Those who deal with Tier II accounts only will have to bear all the fees and charges. The employer will not be responsible for any payments. So, let us take a look at the applicable fees and charges:
|Types of Charges†||Actual Charge or Fees|
|Fees for Account Opening||INR 50 (one time)|
|Charge for Maintaining Account||INR 190 (recurring charge applicable once a year)|
|Transaction Fee||INR 4 for every transaction|
|POP* Initiation Fee for Registration||INR 100 (one time)|
|Other POP Charges||0.25% of investor’s initial contribution. This amount will be charged for upload of contributed amount and all transactions that will be made after upload of contribution|
|INR 20 if transactions are made in subscriber’s account when the subscriber or the investor makes no contributions or investments|
† Please note that the charges will be applicable from joining date and may be subject to service taxes.
*POP stands for Points of Presence. These are entities that are appointed by PFRDA for rendering NPS services at various locations.
NPS Rules to Follow
|General Withdrawal Rules (As laid down by PFRDA)||Of the total accumulated funds over the whole investment period, NPS retains at least 40% or at least 80% of the corpus and reinvests in annuity purchase so that regular pension stream can be generated. Remaining is paid out in lump sum.|
|If the subscriber dies, the whole of accumulated pension corpus is paid out to the person that was nominated by the subscriber.|
|Rules for Tier I and Tier II Account Withdrawals||Tier I||After 15 years of service, withdrawal from Tier I account is allowed.|
|After 25 years of service, withdrawal of up to 50% of accumulated fund from Tier I account is allowed.|
|These withdrawals are allowed only and only under very serious or emergency conditions.|
|Tier II||There are absolutely no restrictions put on withdrawals. Withdrawals can be made whenever required.|
|Tier I Account and Tier II Account Premature Withdrawal General Rules||25% of total contributed amount is allowed to be withdrawn by investor.|
|A subscriber can make no more than 3 premature withdrawals.|
|10 years of minimum contribution is mandatory for premature withdrawal eligibility.|
|For major emergency situations like some medical emergency, treatment expenses are allowed through premature withdrawals.|
|Marital and educational costs of the investor’s children can also be covered through premature withdrawals.|
|First time homebuyers are also allowed to make premature withdrawals.|
Is There a Process for Withdrawal?
Since withdrawals are subject to certain conditions under National Pension Scheme, there is a specific process that one needs to follow for withdrawals. The whole process is give in bullet points below:
A person looking for withdrawal apparently means that he or she will stop contributing. In such a scenario, he or she will have to collect a withdrawal form from Point of Preference and fill it up properly and then submit again to the Point of Preference.
Submitting the withdrawal form will not be enough. A number of documents are to be submitted. These documents include:
- One identity proof.
- One address proof.
- The PRAN Card – the original one that was issued when NPS account was opened.
- Cancelled Cheque or a bank certificates which will clearly mention the subscriber’s name, account number of the bank and its IFCS code too. These details are required for transferring the money to the bank account. Transfer can take place electronically or a direct deposit may be made depending on feasibility.
Once all these documents are submitted, POP will send the whole bunch to NSDL and CRA where authenticity of the documents will be verified to ensure that the withdrawal claim is coming from the authentic subscriber. Once the documents pass the verification, CRA will settle the claim and transfer the money to the bank account of the subscriber.
Are There Different Type of Withdrawal Forms?
That’s a really smart question. Because there are many rules for withdrawal, there are different types of withdrawal forms too. Let us take a quick look at the types of withdrawal forms that are available under NPS and their purpose. We will use a table for clear understanding.
|Forms for||Form Names||Purpose|
|Government Employees||Form 101GS||This withdrawal form is meant for withdrawals after an employee retires and wishes to take out all the money.|
|Form 102GP||This withdrawal form is meant for withdrawals before an employee retires and wishes to take out all the money.|
|Form 103GD||This form is meant for the legal heirs of nominees of the investor or the subscriber in the event of the death of the subscriber. This is actually a claims form.|
|Corporate Employees||Form 301||Employees of private companies or any Indian (apart from government employees and Swavalamban subscribers) who want to withdraw all funds after retirement.|
|Form 302||Employees of private companies or any Indian (apart from government employees and Swavalamban subscribers) who want to withdraw all funds before retirement.|
|Form 303||This form is meant for the legal heirs or nominees of the investor or subscriber for claiming the accumulated funds in case of unfortunate death of the subscriber.|
|Swavalamban Subscribers||Form 501||This form is for Swavalamban subscribers in case they wish to withdraw all funds after retirement.|
|Form 502||This form is for Swavalamban subscribers in case they wish to withdraw all funds before retirement.|
|Form 503||This form is for nominee of the subscriber for claiming the funds in case of the death of the subscriber. However, the nominee too needs to be from Swavalamban sector.|
Are There Any Death Benefits Available?
There is no such thing called death benefit. What really happens is that if the subscriber dies unfortunately, the nominee or the legal heir can withdraw the funds using the proper form. The whole amount will be transferred in lump sum. However, for this to happen, the nominee or the legal heir needs to provide the following:
- A properly filled withdrawal form.
- Original PRAN card of the subscriber.
- Death certificate of the subscriber.
- A certificate or a valid document which will prove that the claimant is actually a nominee or a legal heir.
- ID and address proofs of the claimant or the nominee or legal heir.
- Cancelled Cheque or certificates from bank which is give the name of the nominee or the legal heir, the bank account number, IFSC code of bank where the money has to be transferred.
All these documents will be verified by CRA and upon successful verification, money will be transferred to the given bank account.
Well, that’s pretty much everything about National Pension Scheme. In case you have any other questions, feel free to drop comments. We will try to answer the same either through the comments section or we will update this article with additional information.