National Pension Scheme (NPS) Tier 1: Contribution, Returns & Withdrawal

NPS Tier 1 is a retirement account. It is the primary NPS account and you can only open a Tier 2 account after opening a Tier 1 account. The account can be opened under the NPS (Central Govt), NPS (State Govt), NPS (Corporate) and NPS (All Citizens Models). Different rules apply to each, but the general rules stated below apply to all types of NPS Tier 1 accounts.

You need to deposit at least Rs 1,000 per annum to keep the account active. The NPS Tier 1 account matures at the age of 60 and you can extend it till the age of 70.

NPS Tier 1 is eligible for tax deduction on contributions up to Rs 1.5 lakh under Section 80 C and an additional Rs 50,000 under Section 80 CCD (1B) of the Income Tax Act, 1961. On withdrawal, 40% of the NPS Tier 1 account balance can be withdrawn tax-free. Another 40% must be compulsorily used to buy an annuity (monthly pension). The remaining 20% can either be used to buy an annuity or can be withdrawn after paying tax (at your slab rate).

Eligibility:

You have to be a citizen of India. NRIs can also open it as long as they are Indian citizens.

You have to be between 18 and 65 years of age. Special rules apply if you open an NPS Tier 1 account from the age of 60 – 65.

Minimum Investment: Rs 1,000 per annum

Maximum Investment: No upper limit

Lock-in: Till you attain the age of 60

Returns: Depend on the asset allocation and pension funds chosen by you.

How to open an NPS Tier 1 account

If you have an Aadhar Card, PAN Card and bank account, you can open an NPS account online at enps.nsdl.com or enps.karvy.com. These are the portals of the Central Recordkeeping Agencies (CRAs) in the NPS.

• If you prefer to do this offline (in person) you can go to your nearest NPS Point-of-Presence (PoP) which is typically a designated branch of your bank. You can get a full list of NPS PoPs here.
• In either case (online or offline account opening), you can make contributions, change key details, change fund managers and initiate withdrawals online at enps.nsdl.com or enps.karvy.com.

NPS Tier 1 Contribution

The minimum NPS Tier 1 contribution is Rs 1,000 per annum. There is no maximum limit on your NPS Tier 1 contribution. The minimum initial contribution to the NPS Tier 1 Account is Rs 500.

You can contribute online to NPS Tier 1 at enps.nsdl.com

Another Reading: National Pension Scheme Retirement Scheme for all (NPS)

NPS Tier 1 withdrawal rules

You can make up to 3 partial withdrawals from NPS Tier 1 during the lifetime of your NPS account. Such withdrawals can be made 3 years after opening the account.

• They can be made on specific grounds such as medical treatment, higher education of children, marriage of children, home purchase etc.
• These withdrawals cannot in the aggregate exceed 25% of your contributions and are tax-free.

You can download the form for NPS partial withdrawals here.

• The NPS account matures at the age of 60 and you can withdraw up to 60% of your NPS corpus tax-free. The balance 40% has to be used to buy an annuity (regular pension). The annuity will be taxable each year.

You can also opt for premature exit before the age of 60, provided you have completed 3 years in the NPS. In such a scenario, you can withdraw a maximum of 20% of your corpus which will be a taxable withdrawal. The balance 80% has to be converted to an annuity.

NPS Tier 1 Lock-in Period

The NPS Tier 1 account has a lock-in till the age of 60. However, as mentioned above, you can exit the system prematurely before 60 subject to the terms and conditions mentioned above.

NPS Tier 1 Tax Benefits

You get a tax deduction under Section 80CCD(1) and 80CCD(2) on contributions to the NPS up to Rs 1.5 lakh per annum.

• For employees the maximum contribution eligible for tax deduction under these sections is limited to 20% of salary.
• For self-employed, the maximum contribution eligible for tax deduction under these sections is limited to 20% of income.
• In addition, you can get a tax deduction on contributions up to Rs 50,000 under Section 80CCD(1B). Hence the total tax benefit on contributions to the NPS is Rs 2 lakh per annum.
• In addition, the returns on NPS are tax exempt while the money is retained in the NPS account.
• On maturity, up to 60% of the accumulated NPS corpus can be withdrawn free of tax. Another 40% must be used to buy an annuity (regular pension).

How to withdraw money from NPS Tier 1

You can log in to your NPS Tier 1 account from enps.nsdl.com. You need to provide your PRAN number and date of birth in order to login. You can make withdrawals online after logging into your account.

Alternatively, you can go to the nearest branch of your NPS point-of-presence (PoP), usually your bank and submit a withdrawal request there.

How to close an NPS Tier 1 Account

You can submit a request you close your NPS Tier 1 account by logging into your account online at enps.nsdl.com.

Alternatively, you can go to the nearest branch of your NPS point-of-presence (PoP), usually your bank and submit a closure request there.

Tier 1 Returns

NPS Tier 1 returns are derived by investing in equities, corporate bonds, government bonds  and alternative assets – the four NPS asset classes. You can decide the split between these assets as per your convenience subject to a limit of 75% on equity investment and 5% on alternative assets*. You can decide You can also select 1 of 8 NPS pension fund manager. They are SBI, UTI, LIC, Aditya Birla, HDFC, Kotak, ICICI Prudential and Reliance Capital. NPS returns are thus akin to mutual fund returns rather than the fixed returns offered by savings schemes like PPF. You can view the historic returns of NPS Pension Funds below:

*Different limits apply to government employees

Another Reading: 7 Government of India Schemes to Invest for Social Security