What is NPS and how does it work? Learn about eligibility, returns, tax benefits, and how to open an account.

What is NPS? Who can invest in it, and what kind of returns does it offer? Find out about NPS eligibility, tax benefits, and the easy way to open an NPS account online.

The need for money persists even after retirement. Therefore, it is essential to build a fund for the future by saving small amounts during one's working years. The National Pension System (NPS) is one such scheme that allows you to build a retirement corpus through long-term investment. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

What is NPS, and who can open an account?

NPS is a retirement savings scheme. It allows you to regularly invest a portion of your earnings. According to current PFRDA rules, Indian citizens and Overseas Citizens of India (OCIs) aged between 18 and 85 years can join NPS, provided they meet the KYC requirements.

You do not need to be a salaried employee to invest in NPS; both employed and self-employed individuals can invest in it. Even individuals already investing in EPF, PPF, or other pension schemes can opt for NPS. However, a single individual cannot hold more than one NPS account.

What returns does NPS offer?

Returns on NPS are not predetermined. Funds are invested across various asset classes, and returns depend on market performance. This means there is no guaranteed return, such as fixed interest. Your retirement corpus is built based on your investments, the chosen investment options, and market performance.

That is why, before investing in NPS, it is important to understand that market-linked investments do not offer guaranteed returns.

Two types of NPS accounts

There are two types of NPS accounts: Tier-I and Tier-II accounts. Tier-I is the primary account for retirement and offers tax benefits. Tier-II is an optional account that offers greater flexibility for withdrawals; however, contributions to this account generally do not qualify for NPS tax benefits.

Tax Benefits with NPS

A major advantage of NPS is tax saving. According to the NPS Trust, investments in Tier-I qualify for income tax exemptions. Under the old tax regime, a deduction of up to ₹1.5 lakh is available under Section 80CCD(1) of the Income Tax Act. Additionally, one can avail of an extra tax deduction of up to ₹50,000 under Section 80CCD(1B).

Furthermore, employer contributions to NPS may also be eligible for tax benefits under Section 80CCD(2). Under this provision, you can receive up to 14% of your basic salary as a contribution to Corporate NPS, which qualifies for a tax exemption. A key feature of Corporate NPS is that its benefits can be availed under both the new and old tax regimes.

How to Open an NPS Account?

An NPS account can be opened online via the eNPS platform or through a Point of Presence (PoP) associated with the PFRDA. The online process involves registration, KYC completion, and the submission of necessary details to open the account.

Process for Opening an Account Online?

• Visit the official NPS/eNPS website and click on 'Registration'.
• Select the 'Individual Subscriber' option.
• Choose your citizenship status and KYC method.
• Provide your Aadhaar/PAN and mobile number, then verify using the OTP.
• Enter your personal and bank details.
• Enter nominee details.
• Select the Tier-I account; you may also add a Tier-II account if required.
• Choose your pension fund and investment option.
• Make the mandatory initial contribution.
• Complete the application using eSign or OTP.
• You will receive a PRAN (Permanent Retirement Account Number) upon successful registration.
• You can use this PRAN to manage your NPS account going forward.

Note: NPS is designed for retirement planning. The returns are market-linked; therefore, it is important to understand your needs and risk profile before investing.