How to open an NPS account

NPS is regulated by the Pension Fund Regulatory and Development Authority under its own statute. Below the regulator sits the NPS Trust, which holds the assets of the scheme in trust for subscribers. Below that sit the operating entities: Central Recordkeeping Agencies that maintain your account, Points of Presence that on-board you and take your instructions, Pension Funds that manage the money, a Trustee Bank that moves it, and a Custodian that holds the securities.

The separation is the point. The pension fund that invests your money does not hold it. The recordkeeper that maintains your account does not manage the investments. A failure or misconduct at any one of them does not put the corpus in the hands of a party that could dissipate it. For a product you will hold for thirty years, that structural design is worth more than a marginal difference in return.

The second consequence of the architecture is portability. Your Permanent Retirement Account Number is yours, not your employer's. It follows you between jobs, between the government and private sectors, between cities, and between fund managers. You can change your pension fund and your investment option without exiting the product and without a tax event — something you cannot do between mutual funds.

The third is cost. PFRDA caps what pension funds may charge as a fund management fee, and the recordkeeping and Point of Presence charges are also regulated. The result is a total expense far below anything comparable in the retail market. Over decades, that gap compounds into a very large number, and it is the strongest single argument for the product.

The trade-off sits at the other end. The corpus you accumulate cannot simply be taken as cash at retirement. A minimum share must buy an annuity, and once that annuity is purchased the capital is gone in exchange for an income stream. Annuity rates in India have historically been unexciting, and you are locked into whatever the market offers on the day you exit.

There are also two variants of the account worth distinguishing. The all-citizen model is what an individual opens for themselves. The corporate model is where an employer routes a contribution through NPS as part of the salary structure, and government sector accounts operate under their own rules on choice of fund and exit.

Tier I is the pension account and the reason NPS exists. Contributions to it attract the tax deductions, withdrawals are restricted to defined partial withdrawals during the accumulation phase, and exit is governed by the annuitisation rules. It is the account you must have.

Tier II is a voluntary savings account that can only be opened by someone who already has an active Tier I. There is no lock-in and no restriction on withdrawal — money can be taken out at any time and normally reaches the bank account within a few working days. It uses the same pension funds and the same investment options, at the same low charges.

For most subscribers, Tier II carries no tax deduction on contribution, and gains are taxable when withdrawn. It is best understood as a low-cost investment account rather than a retirement product, and its appeal is the charge structure rather than any tax advantage.

There is a distinct variant of Tier II available to central government employees which carries a deduction and a corresponding lock-in. It is not available to the general subscriber, and material that conflates the two is a common source of confusion.

Money can be moved from Tier II into Tier I. It cannot be moved the other way, which is consistent with the whole design: Tier I is a one-way street until exit.

The practical advice most people need is straightforward. Open Tier I for the retirement money and the tax treatment. Open Tier II only if you specifically want a very low-cost, no-lock-in investment account and understand that its gains are taxable — and never treat it as the emergency fund, because a market-linked account is the wrong place for money you may need at a specific time.

Check eligibility. NPS is open to Indian citizens, resident or non-resident, and to overseas citizens of India, within the entry age range the regulator prescribes. It is an individual account: it cannot be opened jointly, and it cannot be opened by a Hindu undivided family.

Choose how to open it. The three routes are online through a Central Recordkeeping Agency's own portal, in person at a Point of Presence such as a bank branch or a registered intermediary, or through your employer under the corporate model. If your employer offers the corporate model, use it — the employer contribution deduction is the benefit that survives under the new tax regime.

Gather what you need: Aadhaar or PAN for identity verification, a bank account with the account number and IFSC, a mobile number and email, a scanned photograph and signature, and your nomination details. Online opening generally uses Aadhaar-based or PAN-based verification with a one-time password.

Complete the registration and choose your Central Recordkeeping Agency. More than one is now available, and they differ in interface, service and some charges rather than in the underlying product. You can change it later.

Select the pension fund and the investment option at this stage — Active or Auto — and set the allocation if you choose Active. Both are changeable later, so do not stall the account opening over this decision.

Make the initial contribution and complete the nomination. Nominate for both Tier I and Tier II separately if you open both, and remember that a nomination decides who the recordkeeper pays, not who is ultimately entitled under succession law.

You will be allotted a Permanent Retirement Account Number and can request a physical PRAN card. Record the number somewhere your family can find it — a forgotten NPS account is a well-documented category of unclaimed asset.

Set up regular contributions. There is a minimum contribution required in each financial year to keep a Tier I account active, and an account that falls below it is frozen and has to be unfrozen by paying the arrears and the prescribed penalty. A standing instruction removes the entire risk.

There are two ways to decide where the money goes. Under Active choice you set the allocation yourself across the available asset classes: equity, corporate debt, government securities and an alternative investment class. Equity is capped as a proportion of the portfolio, and that cap tapers down with age under the regulator's rules.

Under Auto choice the allocation follows a lifecycle path that starts with a higher equity share and reduces it automatically as you get older, moving progressively into debt and government securities. Several lifecycle variants exist — more aggressive, moderate and conservative — differing in the starting equity share and the speed of the glide.

Auto choice is the sensible default for most people, and specifically for anyone who would not otherwise rebalance. The single biggest behavioural failure in long-horizon investing is an allocation that drifts and is never corrected, and the lifecycle option removes that failure entirely.

Active choice is worth using if you have a considered view and will actually act on it. It is not worth using because it feels more sophisticated. The equity cap means the difference between the two is smaller than people expect.

Choose the pension fund from the list of those registered with the regulator. Published scheme-wise returns are available through the NPS Trust, and the differences between managers within an asset class have historically been modest — this is a low-dispersion, tightly regulated space, not one where manager selection dominates the outcome.

Both the pension fund and the investment option can be changed, within the limits and frequency the regulator allows, without exiting the scheme and without a tax event. That is a genuine advantage over most alternatives and it means the initial choice is not a decision you have to get right for thirty years.

For government sector subscribers, the choice of fund and pattern of investment is more constrained, and in some cases the default applies. Check the position for your own sector rather than assuming the all-citizen rules apply.

A Tier I account requires a minimum contribution in each financial year to stay active, along with a minimum amount per contribution. Fall short and the account is frozen: no contributions and no transactions until it is unfrozen by paying the outstanding minimums plus the prescribed penalty.

Charges are levied at several points — a one-time account opening charge, a charge on each contribution collected by the Point of Presence, an annual recordkeeping charge, and the pension fund's management fee — and all of them are regulated. They are low in absolute terms, and the fund management fee in particular is a fraction of what a comparable market product charges. Take the current schedule from PFRDA or the recordkeeper rather than from any general source, as they are revised.

Contributions can be made online through the recordkeeping agency's portal or the mobile application, at a Point of Presence, or through a payroll deduction under the corporate model. Where the contribution is routed by an employer, check your statement — employer contributions occasionally lag, and the subscriber is the only person watching.

Partial withdrawal from Tier I is permitted after the account has run for a minimum number of years, limited to a proportion of your own contributions rather than the whole corpus, and only for specified purposes: children's higher education, children's marriage, purchase or construction of a house, treatment of specified illnesses of the subscriber or immediate family, disability, skill development or re-skilling, and establishing a venture. The number of times you may do it over the life of the account is capped.

Note the base of the calculation: the limit applies to your own contributions, not to the accumulated value including returns and any employer contribution. This is the point most subscribers get wrong when they plan around a partial withdrawal.

Tier II has no such restrictions. Redemption requests are processed at the applicable net asset value and the money reaches your registered bank account within a few working days.

Keep the registered mobile number, email and bank account current. A stale bank account on the record is the commonest cause of a failed withdrawal, and updating it during a withdrawal is slower than updating it beforehand.

At the normal exit age or on superannuation, the corpus is split. A minimum proportion must be applied to purchase an annuity from an Annuity Service Provider empanelled with the regulator, and the balance may be taken as a lump sum. Where the total corpus is below a threshold the regulator sets, the entire amount may be withdrawn as a lump sum without buying an annuity at all.

You are not obliged to exit the day you turn the normal exit age. Continuation of the account beyond it is permitted up to a maximum age, and both the lump sum and the annuity purchase can be deferred within the limits the regulator prescribes. A facility also exists for taking the lump sum in phased instalments over a period rather than all at once, which can be useful for managing the timing of income.

Exit before the normal age is deliberately unattractive. A much smaller proportion may be taken as a lump sum and a much larger proportion must be annuitised, again with an exception where the corpus is below the threshold. Treat NPS money as genuinely committed until retirement.

The annuity is chosen at exit from the products the empanelled insurers offer — a life annuity, a joint life annuity with the spouse, an annuity with return of purchase price, and variants. The rate you get is the rate available on the day, and it is not something you can hedge in advance.

Now the tax. The lump sum withdrawn at exit within the prescribed limits is exempt. The amount applied to purchase the annuity is not taxed at the point of purchase. But the annuity income itself is taxable as income in each year you receive it, at your slab rate. NPS therefore defers tax on that portion rather than eliminating it, and any comparison that treats the whole corpus as tax-free is wrong.

On the death of a subscriber before exit, the accumulated pension wealth is payable to the nominee or legal heir, with the rules differing between the government and non-government sectors. Keep the nomination current, and tell your family the account exists.

Finally, place NPS correctly against the alternatives. Employees' provident fund gives you an employer share and a declared rate with no annuitisation. Public provident fund gives you a government-declared rate that is exempt at every stage. NPS gives you market-linked returns at the lowest charges available and forces part of the outcome into an annuity. They do different jobs, and for most salaried people the sensible answer is some of each rather than a choice between them.