You will need to pay a penalty if you skip NPS contributions (2024)

If you open a National Pension System (NPS) account, you are required to contribute every year into that account. NPS is a retirement product that requires you to lock in until 60 years of age. So what happens if you stop contributing to your pension account? You need to pay a penalty. But first understand what NPS is and then the penalties you will have to pay on violating NPS rules.

What is NPS?

The tier-1 account or the retirement account of the NPS is a long-term product that takes contributions from you every year and puts that money in investment funds of your choice. Right now there are three fund options to choose from: equity fund (in which you can’t put more than half of your money), corporate bond fund and government securities fund. You can also choose the pension fund manager you want to manage your money.

You are expected to invest at least 6,000 every year. You could either contribute this money at one go or break it up in instalments of 500 every month, the second option, though, will be expensive. This money will remain invested till 60 years of age. At 60, you can withdraw 60% of the accumulated corpus but you need to buy annuity—a pension product that pays periodic income in your retirement days—with at least 40% of the corpus.

If you want to withdraw money earlier than 60 years, you need to annuitize at least 80% of that money. However PFRDA Act 2013 does allow for partial withdrawals under special circ*mstances and this is likely to get notified soon.

NPS also offers a tier-II account that is completely flexible. The investment pattern in this account is similar to the pension account, but it allows withdrawals. You, however, need to maintain a minimum balance of 2,000 every year.

Penalty for not following the rules

You know that every year you need to invest at least 6,000 in your pension account. So if you skip paying that money or pay less than that, the Pension Fund Regulatory and Development Authority will freeze your account. You will not be able to transact until you pay the minimum contribution along with a penalty of 100 per year of no contributions. Even as the account is frozen, the money will stay invested until the fund value does not reach zero. The account will then close and you will have to reactivate it.

You will need to pay a penalty of 100 even in the case of tier-II account if you skip the yearly contribution or not maintain the minimum balance of 2,000.

Updated: 22 Oct 2013, 07:17 PM IST