How To Invest in The National Pension System?

October 20, 2021

How To Invest in The National Pension System?


If you are planning for retirement and looking forward to building a corpus for the same, the National Pension System (NPS) can be an ideal financial tool to do so. It’s a Government of India-backed initiative that allows you to spend money across different asset classes as per your choice to build your retirement corpus.

The Pension Fund Regulatory and Development Authority of India (PFRDA) is the body that governs the NPS. You can invest in NPS if you are in the age group of 18 to 65 years of age. In the past few years, NPS rules have been modified to make it investor-friendly. Read on to know how you can invest in it to build a sizable retirement kitty.



Types of NPS Accounts to Invest In

Prior to investing in the NPS, you must know the existence of two accounts that you can invest in:

 Tier I NPS Account

Tier I is the retirement account. It’s this account through which you invest and build a corpus for the golden years of your life. When you open a Tier I account, you are allotted a permanent retirement account (PRAN) number. It’s a 12-digit number. The minimum contribution that you need to make while opening a Tier I account is INR 500. Annually, to keep the account active, you need to contribute INR 1,000.

However, note that there is no cap on the maximum investment amount in a Tier I account. The money that you invest in a Tier I account is locked until you turn 60. Once you are 60, you can withdraw 60% of the accumulated corpus as lump sum. You need to use the remaining 40% of the corpus to buy an annuity plan from the insurance company that will pay you a monthly pension.

Your investment towards a Tier I account qualifies for tax exemption under Section 80CCD of the Income Tax Act 1961. 

Tier II NPS Account

Tier II accounts can only be opened if you’ve got a Tier I account. It’s a voluntary account that you can open by paying a minimum deposit of INR 1,000. Post that, you can contribute any amount that you wish to. An important thing to note is that investments made in Tier II accounts don’t enjoy any exemption. In other words, you don’t get any benefits on the deposits made in a Tier II account.



Steps to Open a NPS Account

Now that you know about the two types of NPS accounts, let’s understand how to open an NPS account. It’s pretty straightforward-you can do it either online or offline.


A.     Opening an NPS Account Online

 Before you proceed to open an account online, keep these things with you:

·        Aadhaar Card

·        Net banking details

·        Passport size photographs

·        Scanned image of your signature

·        PAN Card


Once these are ready,

Visit the official NPS website. When the site opens, click on ‘Registration’ and choose ‘Individual’.

After this, feed in your Aadhaar card and PAN card number. Once you do so, you will receive an one-time password (OTP) on your registered mobile number.

Input the OTP and click on ‘Continue’. Post this, you will get an acknowledgment number that has your name. Select ‘OK’.

In the next stage, provide your personal details and then click ‘Save and Proceed’. Next, you are required to choose your asset allocation: Auto or Active. Once you have done that, fill up the nominee details.

After filling up the nominee details, upload a cancelled cheque of your bank account along with your specimen signature.

Now comes the final stage, where you need to pay a minimum of INR 500. Once you have made the payment through net banking, you will receive your PRAN number and the payment receipt.


B.     Opening a NPS Account Offline

To open a NPS account offline, visit any point of presence (POP) appointed by the PFRDA. Most of the banks are enrolled as POPs. Visit your nearest POP with the photocopies of the original know-your-customer (KYC) documents. However, keep the originals for verification purposes.

You will receive an application form for account opening that you must fill with a black pen.

After you fill-up the application form, you will receive a 17-digit receipt number.

Once your application is verified, you will receive a kit containing your PRAN number at your registered address.

You will also receive a message or a SMS on your registered mobile number intimating you about the PRAN number and the kit dispatch.



Choosing Asset Allocation During NPS Account Opening

As mentioned earlier, you need to choose the asset allocation based on which your money will be invested. The asset choices that you get are:

·        Equities

·        Government Securities

·        Corporate Debt

·        Alternative Investment Funds

 There are two choices for asset allocation: Active and Auto.


A.     Active Asset Allocation

If you want to decide your own asset mix, then go for the Active choice. When you choose this option, you can decide how much will flow in each asset class mentioned above. However, note that the maximum you can allocate for equities is restricted to 75%. Once you cross 50 years of age, the percentage of equity investment would come down.

Why would the equity investment come down? This is because equities are a volatile asset class. They react to various market sentiments, and in case of a market fall, the gains can quickly evaporate. Also, as you near your goal, it’s recommended to bring down the equity portion to keep the gains intact.


B.     Auto Choice Asset Allocation

When you choose Auto, you get the option to invest in three different lifecycle funds where investments in equities are capped up to 35 years of age. The table given below shows the name of these three life cycle funds along with the equity percentage that’s capped:

Name of Life Cycle Funds

Equity Percentage Capped Till 35 Years of Age

Aggressive Life Cycle Fund


Moderate Life Cycle Fund


Conservative Life Cycle Fund



So, if you want a heavy dose of equity in your portfolio in the auto choice, you can opt for the aggressive lifecycle fund. On the other hand, if you have a moderate-to-low risk appetite, you can opt for the moderate lifecycle fund or conservative lifecycle fund.



Registered Pension Funds Under NPS

 The registered pension funds that you choose to invest are:

·        HDFC Pension Management Co. Ltd.

·        ICICI Prudential Pension Fund Management Co. Ltd.

·        SBI Pension Funds Pvt. Ltd.

·        UTI Retirement Solutions Ltd.

·        Aditya Birla Sunlife Pension Management Ltd.

·        Kotak Mahindra Pension Fund Ltd.

·        LIC Pension Fund Ltd.


If you wish, you can change your pension fund manager twice in a year. You can also swap between Auto and Active choice twice in a financial year. If you start investing in NPS from a young age, you can build a sizable retirement kitty for yourself that could help you spend your golden years stress-free.





Comment as: