A primer on the New Pension Scheme (NPS)

by Manshu on September 27, 2010

in Retirement Planning

I’ve wanted to write about the New Pension Scheme (NPS) a lot sooner, but never got around to it. Reader Gaurav sent me some great material on it, and got me started.

The stuff that he sent me was an entire post in itself, but I thought I’d add to it, and create a comprehensive post on the New Pension Scheme.

First off, you can call it New Pension Scheme, National Pension System, New Pension System or NPS, anything you like. They’re all the same; I’ve seen different articles call them different names, so that might get a bit confusing, but you’ll soon get used to it.

Next up, some of the things this post will address, are:

  • What is the New Pension Scheme?
  • What are Tier I and Tier II accounts in the NPS?
  • What are the three categories in the NPS?
  • Fees and Expenses related to the NPS?
  • What is the minimum amount needed to invest in the NPS?
  • What are the tax implications of NPS?
  • How can I open a NPS account?
  • Why hasn’t this become popular?

What is the New Pension Scheme?

The NPS was introduced by the government last year to give people a way to get a pension during their old age. Employees of the government sector already get a pension, so this scheme was introduced as a social security measure that enables people from the unorganized sector to draw a pension as well.

The working mechanism is quite simple – you contribute a certain sum every month during your working years, which is then invested according to your preference. You can then withdraw the money when you retire, which is currently set at 60 years old.

When I say you invest according to your preference, I mean that there are a couple of different options that you need to select from. These options pertain to your preference on withdrawal, and asset allocation.

What are Tier I and Tier II accounts in the NPS?

The NPS is meant to be a pension scheme, so it is geared towards giving you a steady stream of income on your retirement.

That means that NPS makes it difficult to withdraw your money during your working years or till the age of 60 in this case.

Tier I and Tier II are two options under the scheme where you can invest your money, the primary difference between them is how they differ in allowing you to withdraw your money before retirement.

NPS Tier I

There is severe restriction on withdrawing your money before the age of 60, because it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before 60. You can keep the remaining 20% with you.

When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.

Here are the details of how your money can be withdrawn in a NPS Tier I account.


Death is another way of getting the money, but that might come in the way of other plans you have.

NPS Tier II Account

The first thing about the NPS Tier II account is that you need to have a Tier I account in order to open a Tier II account.

The Tier II account makes it easy for you to withdraw your money before retirement because there is no limit on the withdrawals you can make from the Tier II account.

You need to maintain a minimum balance of Rs. 2,000, and you can transfer money from the Tier II account to Tier I account, but not the other way around.

There is a Rs. 350 CRA (Credit Record Keeping Agency) charge which is not present in the Tier II account, but the rest of the fees remain the same.

Asset Allocation and Categories in the NPS

There is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your money is invested in a certain percentage in the various classes based on your age.

Here are the three investment classes:

Class Risk Profile Description
G Ultra Safe Will only invest in Central and State government bonds.
C Safe Fixed income securities of entities other than the government
E Medium Investment in equity related products like index funds that replicate the Sensex. However, equity investment will be restricted to 50% of the portfolio.

In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E.

Now, there are pension funds that will manage your money, and in either of these options you have to select the fund manager who will manage your fund. So even if you select the Auto Choice, you still have to tell them which fund manager you want to manage your money.

Fees and Costs related to the NPS

I talk about expenses a lot here, and the expenses on the NPS are really low. The annual fund management charge is 0.0009%, which is probably the lowest in the world.

There are some other expenses associated with the NPS, but as you will see all of them are quite low as well. Here is a list of the other expenses.


What is the minimum amount needed to invest in the NPS?

For a Tier I NPS account you need to contribute a minimum of Rs. 6,000 per year, and make at least 4 contributions in a year. The minimum amount per contribution can be Rs. 500.

Minimum amount for opening Tier II account is Rs. 1,000, minimum balance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.

What are the tax implications of NPS?

The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal. Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage to other products like ULIPs and Mutual Funds. But the revised code proposes it to be exempt from tax, and that really adds to its lure.

How can I open a NPS account?

You can open a NPS account by going to the bank branches of the banks that are authorized to sell this.



This is quite a good option for people who wish to invest for their retirement, and the government has done good to come up with such an option. It is still early days for the scheme so there are going to be some teething troubles, and I am sure you have come across several articles that write the NPS off completely, or suggest major changes.

While it has not gained in popularity the way you would’ve expected with the low cost structure, a primary reason of that is there is no real incentive for anyone to push this to consumers, so it has not gained any real traction.

That being said, the scheme is a good initiative, and given enough time, the chinks should be ironed out in its favor.

As a final word – a big thank you to Gaurav who sent me all the material, and pushed me to write about the NPS. Thanks Gaurav!

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{ 449 comments… read them below or add one }

Suresh D March 9, 2015 at 3:42 PM

Hi Sir,

Good article. But I am still not able to understand clearly the whole process. Let me go thru your article line by line to understand.

Suresh D


mane avinash March 9, 2015 at 4:22 PM



vishal dhankhar March 16, 2015 at 11:25 PM

how can get agency of nps sawalibhan yojana


vishal dhankhar March 18, 2015 at 1:38 PM

how sir reply me ya call me urgentali


shivam mishra March 23, 2015 at 8:15 PM

mujhe hona


m.c.khandelwal March 31, 2015 at 6:42 PM

i am in sbi, i leave the bank job and going to other semi govt. co. without showing previous employment detail, can my pran no. cancelled and new no. can issue through new employer.


farid.khan April 24, 2015 at 5:50 PM

Key app meri madat karge key my father 62years old sad ar.bazaar se me phone number 9711552674 places call you


shudhanshu kumat May 16, 2015 at 12:25 PM

sil crpf me leave eol me regulised karne ka kiya matlab hai without pay


Ravikrishna September 25, 2015 at 8:49 PM

Dear manikaran singal I want to know details about NPS PRAN account… I am working as a police constable in andhra Pradesh from 2013. one year later I am selected as a railway t.c wait list candidate. at the time of document verification I weren’t tell I were a working employ, presently I was declared as confirm list candidate… I know about once I resign the police job the details of PRAN account number details will closed or not? there will be any disturbance to enroll new PRAN account from central government. please send me a clear information to save my job.


SB October 11, 2015 at 3:50 PM

Hi Shiv,

Can you share your comments and recommendations regarding NPS under the current scenario?

Thanks in advance.



manoj kumar singh October 15, 2015 at 8:00 PM

I want to know everything about nps because I have no idea and no pension after retirement and not any further income after ret.


SB November 4, 2015 at 11:12 AM

Hi Shiv,

Let us assume that we have an employee in corporate sector at 30% tax bracket. I would assume that he would go for NPS only if he is a pessimist about his career and future wealth creation prospects i.e. he expects that he will have very less retirement income. Since proceeds are taxable at withdrawal including the annuity payments, NPS will not be tax effective for someone who will still be in 30% or 20% tax bracket during retirement years.

However, if the personal tax is completely done away with in the long term, then it may make sense to invest and take the tax benefit of 50000 now itself.

What would you suggest to this employee from corporate sector at 30% tax bracket (assuming he has exhausted all other tax planning schemes PPF,EPF, other 80C deductions to the fullest extent)?

Thanks in advance.


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