Understanding the National Pension System (NPS): Key Features, Tax Advantages, and Enrollment Process

The National Pension System (NPS) in India provides a long-term retirement savings solution, supervised by the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. Individuals can invest in either an NPS Tier-I account or a combination of both Tier-I and Tier-II accounts. Contributions to a Tier-I account are eligible for tax deductions of up to Rs. 2 lakhs under Section 80CCD of the Income Tax Act. Meanwhile, investments in a Tier-II NPS account can qualify for deductions under Section 80C, up to Rs. 1.5 lakhs, provided a three-year lock-in period is observed. The scheme offers market-linked returns rather than a predetermined interest rate.

Recent Updates

As of April 1, 2025, the Central Government introduced the Unified Pension Scheme (UPS). This scheme is accessible to central government employees and existing NPS retirees, who now have the choice to transition from NPS to UPS. The UPS guarantees a minimum pension of Rs. 10,000, a benefit not offered by the standard NPS. All tax advantages available through NPS are also extended to the UPS.

Understanding the National Pension System

Aspects	Details
Objective	To foster savings and investments, aiding citizens in their retirement planning.
Eligibility	Exclusively for Indian citizens aged 18 to 70 years.
Types of Accounts	Tier-I Account: Mandatory for government employees, optional for others. Tier-II Account: Optional for all.
Minimum Contribution	For Tier I: Rs. 500 for initial account opening, then Rs. 1,000 annually. For Tier II: Rs. 250 for initial account opening.
Investment Options	Active choice: Investors select their preferred allocation to equity, debt, or bonds. Passive choice: Equity allocation is determined by the account holder's age.
Withdrawal	At retirement, a minimum of 40% of the accumulated funds must be used to purchase an annuity.
Returns or interest	Returns are subject to market performance; no fixed interest rate is provided.

What is the National Pension System?

The National Pension System is available to employees in public, private, and even unorganized sectors, excluding the armed forces.
It encourages individuals to make regular contributions to a pension account throughout their working lives.
Post-retirement, subscribers can withdraw a portion of their accumulated funds.
The remaining amount is disbursed as a monthly pension after retirement.

NPS Vatsalya

Under the NPS Vatsalya scheme, parents can establish an NPS account for their minor children and contribute periodically until the child reaches 18 years of age.
Upon turning 18, the child can independently manage the account by converting it into a standard NPS account.
Recent announcements in Budget 2025 confirm that all tax benefits offered to the NPS scheme also apply to NPS Vatsalya accounts.

Eligibility for National Pension System

NPS is an advantageous scheme for those who wish to commence retirement planning early and have a moderate risk tolerance. To join NPS, individuals must meet the following criteria:

Must be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).
Must be between 18 and 70 years old.
Must comply with the Know Your Customer (KYC) standards specified in the application.
Must be legally capable of entering into a contract under the Indian Contract Act.
Overseas Citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible.
NPS is an individual pension account and cannot be opened on behalf of another person.

Key Features of National Pension System

Age Criteria

An NPS account can be opened by Indian citizens, including Non-Resident Indians, aged between 18 and 70 years.

Investment Returns

Operating for over a decade, this scheme has typically generated annualized returns ranging from 11% to 20%. Although it does not offer a guaranteed interest rate, its returns have often surpassed those of other tax-saving investments.

Equity Exposure

Currently, equity exposure for the National Pension System is capped between 50% and 75%.
For government employees and senior citizens, this limit is 50%.
Investors can choose between two investment approaches: auto choice or active choice.
Auto choice adjusts investment risk based on the investor's age, favoring more stable, lower-risk options for older participants.
Active choice allows individuals to personally decide on the investment scheme and asset allocation.

Operational Flexibility

NPS subscribers have the freedom to contribute to their fund at any point during a financial year and modify their contribution frequency.
They can select their preferred investment options.
The option to switch fund managers is available if the current manager's performance is unsatisfactory.
Accounts can be managed online from anywhere, ensuring continuity even with changes in city or employment.
The scheme is fully portable across different jobs and geographical locations.

Withdrawal Guidelines

Upon Reaching Superannuation Age

After retirement, individuals can withdraw up to 60% of their total accumulated corpus as a lump sum, with the remaining 40% allocated to an annuity plan.
Subscribers may opt for systematic withdrawals of their desired amount at regular intervals (monthly, quarterly, semi-annually, or annually).
If the total corpus is up to Rs 5 lakh, subscribers can withdraw the entire amount without needing to purchase an annuity plan.
While lump-sum withdrawals are tax-exempt, annuity income is subject to taxation at applicable slab rates.

Early Withdrawal Option

In the event of an early exit (before reaching superannuation age or turning 60), a minimum of 80% of the pension corpus must be utilized to purchase an Annuity.
If the total corpus is Rs. 2.5 lakh or less, the subscriber can opt for a 100% lump-sum withdrawal.

In Case of Subscriber's Demise

Upon the subscriber's death, the entire accumulated pension corpus (100%) will be paid to the designated nominee or legal heir.

It is important to note that NPS Tier-II accounts do not have a lock-in period, allowing for withdrawals at any time.

National Pension System: No Fixed Interest Rate

As NPS is a market-linked scheme, its returns are influenced by the performance of the chosen fund, irrespective of its equity allocation. Consequently, there is no fixed interest rate, unlike other savings schemes. Returns are shaped by several factors, including:

Market conditions and the overall economic climate.
The selected equity allocation.
The performance of the chosen fund manager.
The total duration of the investment.

You can estimate potential returns using the NPS returns calculator.

National Pension System Account Types

National Pension System accounts are primarily categorized into Tier-I and Tier-II accounts.
A Tier-II account is optional and can only be opened by individuals who already hold a Tier-I account.

Comparing NPS Tier-I and Tier-II Accounts

NPS accounts can be established as Tier I or as both Tier I and Tier II. The main differences between these account types are outlined below:

Feature	NPS Tier-I	NPS Tier-II
Eligibility	All Indian citizens (18–70 years)	Only those with an active Tier-I account
Account Type	Retirement-focused (pension account)	Voluntary savings account
Mandatory or optional	Central/state govt. employees (optional for other employers)	No one – completely optional
Minimum Contribution	₹500 per contribution (₹1,000/year minimum)	₹250 per contribution (no annual minimum)
Withdrawals	Restricted until age 60 (partial allowed in specific cases)	Fully flexible – can withdraw anytime
Tax Benefits	Under Sec 80C (up to ₹1.5 lakh) + Sec 80CCD(1B) (₹50k extra)	No tax benefit (except govt. employees under 80C with 3-year lock-in)
Employer Contribution	Restrictions apply; annuity purchase mandatory	No restrictions
Purpose	Long-term retirement savings	Flexible investment/savings

Regulations

The PFRDA governs NPS with clear investment standards, regular performance evaluations, and oversight of fund managers by the NPS Trust.

Tax Advantages of NPS Tier-I Accounts - Section 80CCD

Tax Benefits on Personal Contributions

Employees contributing to NPS can avail the following tax deductions on their personal contributions:

A tax deduction of up to 10% of salary (Basic + Dearness Allowance) under Section 80CCD(1), capped at Rs. 1.5 lakh under Section 80CCE.
An additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B), beyond the Rs. 1.5 lakh limit of Section 80CCE.
These deductions are not available under the new tax regime.

Tax Benefits on Employer Contributions

Under Section 80CCD(2), a deduction can be claimed for employer contributions to NPS, up to 10% of salary (or 14% under the new regime).
For central government employers, 14% of salary can be claimed as a deduction, regardless of the tax regime chosen.

Tax Benefits for Self-Employed Individuals

Self-employed individuals contributing to NPS can claim the following tax deductions on their contributions:

A tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs. 1.5 lakh under Section 80CCE.
An additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B), beyond the Rs. 1.5 lakh limit of Section 80CCE.
These deductions are not available under the new tax regime.

Tax Benefits on Withdrawals

Partial Withdrawals

Partial withdrawals from NPS are tax-exempt when the withdrawn amount does not exceed 25% of the self-contribution, in accordance with the conditions and criteria set by PFRDA under Section 10(12B).

Lump Sum Withdrawals

Section 10 grants a tax exemption on a lump-sum withdrawal of 60% of accumulated NPS funds upon reaching 60 years of age or superannuation.

Tax Benefit on Annuity Purchases

Tax exemption is provided for annuity purchases upon superannuation at 60 years under Section 80CCD(5). However, any subsequent income derived from the annuity is taxable under Section 80CCD(3).

Tax Advantages of NPS Tier-II Accounts - Section 80C

An NPS Tier-II account is an optional account available to Tier-I account holders.
Contributions made to Tier-II accounts can be claimed as a deduction under Section 80C of the Income Tax Act.
To claim this deduction, a minimum lock-in period of three years is required.
Up to Rs. 1.5 lakh of contributions can be claimed as a deduction, subject to the combined overall limit under Section 80C.
This deduction cannot be availed under the new tax regime.

Additional Benefits of NPS

Investment Flexibility: NPS allows you to choose your fund managers and determine your equity exposure. Aggressive investors can opt for highly equity-oriented funds, while others can choose more conservative options.
Transferability: Your NPS account remains portable even if you change jobs, requiring minimal paperwork.
Low Fund Manager Charges: NPS features some of the lowest fund management fees, leading to greater capital accumulation compared to alternative funds.
Retirement Planning: NPS offers a structured pension plan, helping you effectively plan for retirement and establish a stable income stream post-employment.

NPS vs. UPS: A Comparison

As previously noted, the government introduced the Unified Pension Scheme (UPS) as an option within NPS. It ensures a minimum pension payout after a specified number of years of service. Key distinctions between NPS and UPS are summarized below:

Particulars	National Pension Scheme	Unified Pension Scheme
Meaning	Designed to encourage savings and investments, assisting citizens with retirement planning.	An option within the National Pension Scheme, guaranteeing a minimum monthly payout at retirement.
Eligibility	Indian citizens aged 18 to 70.	Only Central Government employees covered by NPS (NPS retirees can also opt for UPS).
Tax Benefits	Deductions available under sections 80C, 80CCD(2) of the Income Tax Act.	The tax deductions applicable to NPS are also extended to UPS.
Minimum Pension Amount	No guaranteed minimum pension amount.	Guaranteed pension amount of Rs. 10,000.
Employee Contribution	10% of basic salary + Dearness Allowance (DA).	10% of basic salary + Dearness Allowance (DA).
Employer Contribution	14% of basic salary + Dearness Allowance (DA).	8.5% of basic salary + Dearness Allowance (DA).
Pension calculation	Returns are based on market performance.	50% of average basic pay over the last 12 months (for employees with 25+ years of service).

How to Establish an NPS Account

Opening an NPS account can now be completed in under thirty minutes. Online account creation (via enps.nsdl.com) is streamlined if you link your account to your PAN, Aadhaar, and mobile number.

You can verify the registration using an OTP sent to your mobile. This process generates a Permanent Retirement Account Number (PRAN), which is then used for NPS login.

Accessing Your National Pension System Account

You can log in to your NPS account through either the NSDL Protean portal or the KFintech portal.
Both NSDL and KFintech logins require a user ID and password. Your Permanent Retirement Account Number (PRAN) serves as the user ID for both websites.

NPS Customer Support Information

NPS Call Centre Number: 1800 110 708

NPS SMS Number: NPS to 56677

NPS Toll-Free Number For Registered Subscriber (with PRAN): 1800 222 080

Concluding Thoughts

Consider investing in the NPS scheme if its benefits align with your risk profile and investment objectives. However, if you prefer greater equity exposure, numerous mutual funds are available to cater to diverse investor backgrounds.