National Pension Scheme is a retirement benefits scheme that gives dual benefits of tax saving and pension. Pension Fund Regulatory and Development Authority (PFRDA) and the government of India regulate the National Pension System. The return from NPS is not fixed but market linked. The pension amount that one will receive upon retirement depends on the performance of the asset classes and the fund manager. The National Pension System has two types of NPS accounts, namely Tier 1 account and Tier II account. This article covers NPS Tier I accounts in detail.
About NPS Tier-1 Account
NPS Tier 1 account is the most basic form of NPS account, and it comes in different forms namely, NPS Government, NPS Central Government, NPS Corporate and NPS All Citizens. The basic rules apply to all types of accounts. However, few specific rules for each of these accounts vary. Tier 1 account is a mandatory account while Tier II account is a voluntary account.
NPS Tier 1 account has a Permanent Retirement Account Number (PRAN). And the tenure of this account is until the investor reaches the age of 60. Hence the investment has a lock in period until retirement. The investor can choose to extend the investment until the age of 70. Upon maturity, the investor can withdraw 60% of the investment amount in a lump sum. This is entirely tax-free. The rest 40% has to be used to purchase an annuity. The income from an annuity is taxable in the year of receipt as per the individual’s income tax slab rate.
During the tenure of the investment, the investor has to make regular contributions every year. The minimum investment to be made to keep the account active is INR 500. The investor also can partially withdraw the investment or opt for a premature exit as per the applicable rules.
Investors can claim tax benefits on their investment in NPS Tier I accounts. They can claim tax benefits up to INR 1.5 lakhs u/s 80 C of the Income Tax Act, 1961. Additionally, they can claim INR 50,000 u/s 80CCD(1B).
Eligibility for an NPS Tier-1 Account
Following are the eligibility criteria to open NPS Tier I account:
- Citizenship: Indian Citizens
- Non Residents: Non-residents can also apply for NPS Tier I account.
- Age limit: 18-65
- Minimum investment: The applicant must contribute a minimum of INR 1,000 to open an NPS Tier I account.
- KYC Compliant: The investor must be KYC complaint or must undergo KYC
How to open an NPS Tier I Account
One can open a NPS Tier I account either through online mode or offline mode. The same is explained in detail below.
To open an NPS Tier I account offline, one needs to locate a Point of Presence – Service Provider (POP-SP). POP-SPs are authorized banks or branches that offer NPS services to NPS subscribers. Following are the steps that one must follow to join the NPS scheme through offline mode:
- Firstly, take a PRAN application form from a POP-SP.
- Secondly, ensure that the application form is filled and signed with all necessary details. While filling the form, one has to ensure that the ‘Tier I Account’ is selected. Then, select the fund manager from the available fund managers. Finally choose the mode of investment, active or auto mode, which will decide the asset allocation for the investor.
- Thirdly, submit the documents after filling in all the other necessary details like nominee name and attach all the KYC documents.
- Then, along with the application, submit an NCIS (instruction slip) with all payment details. The minimum investment that one has to make is INR 500.
- Upon successful registration, the Central Recordkeeping Agency (CRA) will send the PRAN Card.
To open an NPS Tier I account, one must visit the eNPS website and follow the steps below:
- Firstly, go to the registration section on eNPS webpage.
- Secondly, authenticate with OTP linked to the Aadhar card for KYC verification after entering all the necessary details.
- Then, the investor has to select an NPS Tier I account. Also, they have to choose the modes of investment (active or auto) and the fund manager. They will also have to provide nominee details.
- The investor then has to upload scanned copies of PAN, cancelled cheque, photograph and signature in .jpeg, .jpg, and .png format.
- Finally, upon uploading the above files, the investor will be redirected to the payment gateway page. Here the investor had to make the first contribution of a minimum of INR 500. All investments take T+2 days to be credited to the PRAN account.
- PRAN number will be generated immediately upon completion of online registration. Make sure to store this for all further transactions.
Features of an NPS Tier I Account
Following are the features of NPS Tier 1 Account:
NPS Tier 1 scheme is a basic pension account. The subscribers are allotted a Permanent Retirement Account Number (PRAN) when they open their account.
Number of Account
One individual can have only one NPS account.
NPS account matures when the investor attains 60 years. On maturity, the investor can withdraw up to 60% of the fund amount and the remaining 40% to purchase an annuity plan.
The NPS Tier 1 account allows premature withdrawals. However, only in the form of a repayable advance and only if the subscriber has completed 15 years of service. Furthermore, these withdrawals can be done only in case of unforeseen circumstances. Also, for building or purchasing the investor’s first house, NPS can be withdrawn.
Partial withdrawals are allowed, however only up to 50% of the funds, and that too if the subscriber has completed 25 years of service.
The Tier 1 NPS account for public sector employees invests mostly in government and corporate bonds. The scheme requires investors to invest 10% of the basic plus dearness allowance every year. Also, the same amount is contributed to by the government.
Non Government Employees
For private sector employees, the NPS Tier 1 account invests in a mix of fixed deposits, equity funds, government of India bonds, corporate bonds, and liquid funds. It is mandatory for the subscriber to invest at least INR 1,000 per financial year.
The Tier 1 NPS account can be operated from anywhere in the country. Subscribers of NPS can shift from public sector to private sector and vice versa while having the same NPS account.
National Pension Scheme investments up to INR 1,50,000 qualify for tax benefit u/s 80C of the Income Tax Act, 1961. Also, investors can get an additional tax benefit of INR 50K u/s 80 CCD (1B) of the Income Tax Act, 1961.
Withdrawal Process of an NPS Tier I Account
Through the account login of National Pension Scheme (NPS), the subscribers can initiate an online withdrawal request. However, the request has to be authorized and verified by the associated POP. The subscriber needs to use their ‘Claim ID’ or User ID to initiate the withdrawal process.
National Pension Scheme subscribers can initiate withdrawals online using their Claim ID and IPIN in the CRA system. However, this should be done within a period of 6 months before the age of superannuation or the vesting date.
Following is the process to withdraw from the account online:
- Visit the website: https://cra-nsdl.com/CRA.
- Enter the details such as PRAN Number and IPIN to login
- Under the ‘Exit Withdrawal Request’ menu, select the ‘Initiate withdrawal request.’
- Select withdrawal due to as ‘Exit at 60’ and click on Submit to proceed
- If the total corpus is below INR 2,00,000 at the time of retirement, then the subscriber can opt for 100% withdrawal. Select full withdrawal under the Withdrawal type dropdown.
- Check the complete withdrawal subtype.
- Enter the Lump-sum withdrawal percentage and Annuity percentage
- Enter the following details, such as:
- Annuity frequency
- Marital status
- Spouse DOB
- Spouse Gender
- And then select the Annuity Scheme.
- ASP Name
- Scheme Name
- Click on the Proceed button to continue.
- Now, select the transaction type – ‘Electronic’. Click on edit to enter the bank details and submit.
- Next, to enter or edit the nominee details, click on the Edit button.
- Following documents have to be submitted. One can refer to the checklist and select the documents:
- Form 101/301/51 duly filled and signed – stamped by mapped Nodal office.
- Advanced stamped receipt – signed along with revenue stamp
- Original PRAN card
- Cancelled cheque or bank certificate or self-attested copy of bank passbook.
- Aadhar Card and other KYC documents.
- Click on the submit button to complete the withdrawal request.
- Verify and click on the confirm button
- Once the withdrawal request is submitted successfully, it generates an acknowledgement number. One can view and print the withdrawal form.
- Upon completing the process online, the subscriber has to print the form, sign and submit it at the POP along with the following:
- Photograph (pasted and signed across for self-attestation)
- KYC documents (self-attested)
Taxation of an NPS Tier I Account
Following are the tax rules for Tier I National Pension Scheme NPS account:
- Investors can claim a tax benefit on investments up to Rs 1.5 lakhs u/s 80 CCD(1)(section 80C). The deduction has to be a minimum of the following
- 10% of the gross income, in the case of self-employed
- 10% of salary, in the case of a salaried individual
- INR 1,50,000
- INR 50K u/s 80 CCD(1b) can be claimed. Hence the maximum exemption is INR 2 lakhs.
- Investors can claim an additional INR 50,000 as a tax deduction as employer contribution u/s 80CCD(2). The minimum claim should not be above 10% of the salary on employer contribution. However, there is no limit on the maximum amount. Also, this exemption under Section 80CCD(2) is over and above the deduction of INR 1.5 lakhs under Section 80C and 80CCD(1).
- The National Pension Scheme NPS falls under the EET category where the investment and returns are fully exempt from tax. However, the withdrawals are taxable.
- Upon maturity, there is no tax on 60% of the withdrawn amount. However, 40% of the fund amount that the investor will receive from an annuity is taxable as per the investor’s income tax slab.
Difference between NPS Tier 1 and Tier 2 Account
Following is a table showing the difference between Tier 1 and Tier 2 NPS accounts
|Basis of Difference||NPS Tier 1||NPS Tier 2|
|Eligibility||Indian citizens between 18 years and 65 years||Members of tier 1 account only|
|Lock-in period||Till the subscriber is 60 years old||Nil|
|Minimum number of contributions per year||1||Nil, the subscriber can choose not to make any investment in a year|
|Account opening contribution||INR 500||INR 1,000|
|Minimum subsequent contribution||INR 1,000||INR 250|
|Tax Benefits on the contribution||Investments up to Rs 1,50,000 per financial year qualify for tax deduction under Section 80C of the Income Tax Act, 1961. An additional contribution up to INR 50,000 also qualifies for tax deduction under Section 80CCD (1B) of the Income Tax Act, 1961.||No tax benefit|
|Tax on withdrawals||On maturity, the entire pension fund amount is tax-exempt.||The amount is added to the investor’s taxable income and is taxed as per the applicable tax rates.|
|Limit on withdrawals||60% of the pension fund amount can be withdrawn in a lump sum. The remaining 40% has to be used to purchase an annuity plan.||The entire corpus can be withdrawn as a lump sum, or in multiple withdrawals without any limit.|
|Transfer of Funds||Fund from Tier 2 can be transferred to Tier 1. Also, existing funds from EPF can be transferred to Tier 1.||Fund transfer is not allowed.|