NPS Contribution and Investment Process

NPS is administered and regulated by the Pension Fund Regulatory Authority of India (PFRDA). It allows following applicants to invest in NPS:

1. All Indian citizens in the age group of 18 – 70 years
2. NRIs aged between 18 and 60 years can open an NPS account.
3. Government sector employees are automatically enrolled into the NPS scheme and are entitled to receive contributions in their pension account by the government.
4. Private sector employees, as well as self-employed individuals, can voluntarily enroll into NPS and make contributions to their NPS account themselves.
5. Private sector employers’ contributions to the NPS accounts of their employees are permitted.

NPS Contribution for NRIs

Under current regulations provided by the Ministry of External Affairs, NRIs (Non-Resident Indians) have to contribute at least Rs. 500 to open an NPS Tier 1 account. Additionally, they have to contribute at least Rs. 6,000 per annum in order to keep their Tier 1 NPS account in good standing. While, there is no maximum limit on the number of times an NRI can contribute in the Tier 1 account, the minimum amount for each of these contributions is Rs. 500.

The existing rules also specify that NPS contributions by an NRI can only be made through a NRE (Non Resident) Rupee Account or a NRO (Non-Resident Ordinary) Rupee Account. Additionally, NPS contributions are allowed only for NRIs in the age group of 18 years to 60 years. Under existing rules, PIOs (Persons of Indian Origin) and OCIs (Overseas Citizens of India) are not allowed to invest in NPS.

NPS Contribution by Employer

Under existing rules of the scheme, government sector employees are automatically entitled to contributions into their pension account by the government. NPS contribution by the employer is currently less common in the private sector but definitely allowed. Moreover, you are entitled to tax benefits on the employer’s contribution to the NPS irrespective of whether you are a government employee or a private sector employee.

Currently, the maximum employer contribution to NPS which is tax deductible is limited to 10% of your annual basic salary. Thus, if your annual basic salary is Rs. 5 lakh, the employer NPS contribution of up to Rs. 50,000 during the fiscal will be tax deductible. You should, however, keep in mind that this tax benefit against the NPS
contribution by employer will be considered part of the total annual tax deduction benefit of Rs. 2 lakh currently available under the scheme.

Individuals can subscribe to both NPS Tier 1 and Tier 2 accounts. However, to enroll for NPS Tier 2 accounts you first need to have an NPS Tier 1 account. While government employees are automatically enrolled into an NPS Tier 1 account, they can choose to have an additional NPS Tier 2 account.

Private sector employees as well as self-employed individuals have the option to decide if they want to subscribe to the pension fund or not. Moreover, you can also choose if you want to have an additional NPS Tier 2 account or not.

Below listed are the minimum and maximum investment limits of NPS contribution for Tier I and Tier II accounts:

The minimum initial contribution to NPS Tier 1 account is Rs. 500. The minimum annual contribution required is Rs. 1,000 with the minimum amount per contribution being Rs. 500. There is no limit to the maximum annual contribution or the number of times one can contribute annually. In case of NPS Tier 2 accounts, the minimum initial contribution is Rs. 1,000 and the minimum amount per contribution is Rs. 250. In NPS – II, there is no minimum or maximum annual contribution limit.

NPS Tier 1 is an EEE savings scheme and thus, the contribution, returns and the final pension amount are all exempt from tax.

Therefore, contributions to your NPS Tier 1 account up to Rs. 1.5 Lakh in a financial year are exempted from tax under section 80-C of the Income Tax Act, 1961. Additionally, you can also claim additional tax benefits on investments up to Rs. 50,000 over and above the limit of Rs. 1.5 Lakh under section 80CCD (1b).

Therefore, contributions that you make to your NPS Tier 1 account up to Rs. 2 Lakh, can be claimed as a tax deduction. However, NPS Tier 2 accounts do not offer any tax benefits but can help you accumulate a substantial amount of money for your retirement through long-term investments and earning interest on those investments.

Example of How Tax Deduction Works with NPS

Let’s assume your annual gross income is Rs. 6 lakh and you contribute Rs. 1 lakh to NPS Tier 1 during the fiscal. The entire contribution of Rs. 1 lakh is tax deductible. Your net taxable income will now be Rs. 5 lakh.

But you could easily contribute an additional Rs. 1 lakh into NPS to claim the complete Section 80 CCD (1), (2) and (1B) benefits offered by this pension scheme. In such a situation, your net taxable income will be Rs. 4 lakh only (6 lakh – 2 lakh). In case you are in the maximum tax bracket of 30%, your tax burden can be lowered by up to Rs. 60,000 (before surcharge/cess) just by investing in this pension fund.

Read more on NPS Tax Benefits

NPS Tier 1 accounts offer tax benefits but come with certain limitations such as premature withdrawals before maturity or superannuation are allowed only up to 25% of the investment and only three partial withdrawals are permitted during the entire tenure of the account. Upon maturity, a maximum of up to 60% of the corpus can be withdrawn, while it is mandatory to buy an annuity from the remaining 40% corpus. Only if the corpus is less than Rs. 5 Lakh, the subscriber can withdraw the complete amount.

In case of Tier 2 accounts, there are no restrictions on deposits and withdrawals and there is no lock-in period. However, withdrawals from the NPS Tier 2 accounts are fully taxable at the slab rate. Moreover, there are no tax deductions or benefits available on NPS Tier 2 contributions.

Once you have decided to invest in NPS (for salaried and self-employed individuals), you also need to choose the type of investment that you wish to make, that is, either the active or the auto option.

With the active option, you enjoy the flexibility to choose the asset allocation for your investment, that is, select the desirable split of your NPS deposits between equities, corporate bonds, government bonds and alternative assets on your own.

Accordingly, you also need to provide Pension Fund Managers (PFMs) and the percentage allocation to each of the asset classes of NPS considering the cap on each asset class investment.

With the auto option, the asset allocation is done automatically based on your age.

NPS investors have the option to change asset allocation/scheme preference up to 4 times in a financial year and Pension Fund Managers once in a financial year.

It is vital that you choose the option that is suitable for your investment style and risk appetite and then make the contributions accordingly.

With this option, funds are automatically allocated across asset classes as per a predefined matrix and it is rebalanced every year as per the age of the subscriber.

Refer to the table below for asset allocation in each life-cycle fund:

	Aggressive			Moderate				Conservative
Age	E	C	G		E	C	G		E	C	G
Up to 35 years	75%	10%	15%		50%	30%	20%		25%	45%	30%
40	55%	15%	30%		40%	25%	35%		20%	35%	45%
45	35%	20%	45%		30%	20%	50%		15%	25%	60%
50	20%	20%	60%		20%	15%	65%		10%	15%	75%
55	15%	10%	75%		10%	10%	80%		5%	5%	90%

Note: Asset Class E stands for Equity, Asset Class C stands for Corporate Bonds and Asset Class G invests in Government-issued Bonds.

For Aggressive Investors

Age	Aggressive Life Cycle Fund (LC – 75)
	Asset Class (In %)
	E	C	G
Up to 35 years	75	10	15
36 years	71	11	18
37 years	67	12	21
38 years	63	13	24
39 years	59	14	27
40 years	55	15	30
41 years	51	16	33
42 years	47	17	36
43 years	43	18	39
44 years	39	19	42
45 years	35	20	45
46 years	32	20	48
47 years	29	20	51
48 years	26	20	54
49 years	23	20	57
50 years	20	20	60
51 years	19	18	63
52 years	18	16	66
53 years	17	14	69
54 years	16	12	72
55 years & Above	15	10	75

For Moderate Investors

Age	Moderate Life Cycle Fund (LC – 50)
	Asset Class (In %)
	E	C	G
Up to 35 years	50	30	20
36 years	48	29	23
37 years	46	28	26
38 years	44	27	29
39 years	42	26	32
40 years	40	25	35
41 years	38	24	38
42 years	36	23	41
43 years	34	22	44
44 years	32	21	47
45 years	30	20	50
46 years	28	19	53
47 years	26	18	56
48 years	24	17	59
49 years	22	16	62
50 years	20	15	65
51 years	18	14	68
52 years	16	13	71
53 years	14	12	74
54 years	12	11	77
55 years & Above	10	10	80

 For Conservative Investors

Age	Conservative Life Cycle Fund (LC – 25)
	Asset Class (In %)
	E	C	G
Up to 35 years	25	45	30
36 years	24	43	33
37 years	23	41	36
38 years	22	39	39
39 years	21	37	42
40 years	20	35	45
41 years	19	33	48
42 years	18	31	51
43 years	17	29	54
44 years	16	27	57
45 years	15	25	60
46 years	14	23	63
47 years	13	21	66
48 years	12	19	69
49 years	11	17	72
50 years	10	15	75
51 years	9	13	78
52 years	8	11	81
53 years	7	9	84
54 years	6	7	87
55 years & above	5	5	90

In order to contribute to the National Pension System, you must subscribe to it after which you are allocated a Permanent Retirement Account Number (PRAN). Government employees are automatically enrolled into it and provided a PRAN. Private sector employees and self-employed individuals are required to voluntarily sign up under the All-Citizen’s model of the pension system. Upon registering with the pension scheme, they are allotted a unique PRAN that they can use to make pension fund contributions either online or offline.

Q. Is it mandatory to invest in NPS Tier 1 every year?

Ans. Yes, once you subscribe to NPS Tier 1, you need to make a minimum annual contribution of Rs. 1,000 every year to keep your account active.

Q. Can I invest Rs. 50,000 in NPS at once?

Ans. Yes, there is no maximum limit on the amount that you can deposit to your NPS account at once.

Q. Can I invest anytime in NPS?

Ans. Yes, NPS subscribers can contribute to the NPS fund anytime during the financial year. Moreover, there is no limit on the number of times that you can make your NPS contributions.

Q. Can I invest different amounts in NPS every month?

Ans. Yes, your NPS deposits can vary as long you are making the minimum contribution, that is, Rs. 1,000 per annum with the minimum amount per contribution being Rs. 500 for NPS Tier 1 account and Rs. 250 per contribution for NPS Tier 2 accounts.

Q. If I have invested in any other Provident Fund, can I still invest in NPS?

Ans. Yes, investment in NPS is independent of your making contributions to any other Provident Fund.

Q. Can I make contributions to different NPS accounts?

Ans. No, opening multiple NPS accounts is not permitted under the National Pension System. However, you can have an NPS Tier 1 as well as an NPS Tier 2 account.

Q. Can I contribute to my NPS account before I receive my PRAN card?

Ans. Yes, you can contribute to your NPS account even before you receive your PRAN card. Once your PRAN is generated, you can make contributions irrespective of whether you have received the physical copy of the PRAN card or not.

Q. How long will it take for contributions to reflect in my NPS account?

Ans. Your contribution reflects in the NPS account within T+2 working days, where T is the date of successful transaction.

Q. I have already made my NPS contribution through my bank account but my NPS account is still not showing the contribution. What should I do?

Ans. If the contribution doesn’t reflect in your NPS account within T+2 working days, you can register your grievance by logging into your CRA portal. Alternatively, you can also submit your complaint at any PoP-SP.

Q. How to make NPS payment online?

Ans. You can make your NPS contribution payments online via UPI or internet banking.