National Pension System (NPS) – A Complete Guide
The National Pension System (NPS) is a government-backed retirement savings scheme designed to provide financial security post-retirement. It offers a mix of equity and debt investments, ensuring stable returns with tax benefits.
Definition of NPS
The National Pension System (NPS) is a voluntary, long-term retirement savings plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows individuals to contribute systematically and build a retirement corpus while enjoying tax benefits and market-linked returns.
Eligibility for NPS
| Criteria |
Details |
| Who Can Invest? |
Indian Citizens (Resident & NRI) |
| Age Limit |
18 to 70 years |
| Type of Investors |
Salaried & Self-Employed |
| Mandatory for Govt. Employees? |
Yes (since 2004) |
| Can OCI/PIO Invest? |
No |
- Government employees are automatically enrolled.
- Corporate employees and self-employed individuals can opt for NPS voluntarily.
Types of NPS Accountst
| Account Type |
Features |
| Tier I Account |
Mandatory retirement account with restrictions on withdrawals (60% withdrawal at retirement, 40% annuity purchase) |
| Tier II Account |
Optional savings account with no withdrawal restrictions but no tax benefits |
Key Difference: Tier I offers tax benefits, Tier II does not.
Investment Structure & Returns in NPS
NPS investments are market-linked, and returns depend on asset allocation.
Asset Classes in NPS
| Asset Class |
Description |
Expected Returns (p.a.) |
| Equity (E) |
Invests in stock markets |
10-15% |
| Corporate Bonds (C) |
Debt instruments by corporations |
7-9% |
| Government Bonds (G) |
Risk-free sovereign bonds |
6-8% |
| Alternative Assets (A) |
REITs, InvITs, etc. |
8-12% |
- Investors can choose their asset allocation or opt for Auto-Choice based on risk profile.
- Returns in NPS range from 8-12% annually, depending on market conditions.
Tax Benefits on NPS
NPS investments are market-linked, and returns depend on asset allocation.
Asset Classes in NPS
| Tax Benefit |
Amount |
Section |
| Employee Contribution |
Up to ₹1.5 lakh |
Section 80CCD(1) |
| Employer Contribution |
Up to 10% of salary (private), 14% for govt. employees |
Section 80CCD(2) (No limit) |
| Additional Deduction |
₹50,000 |
Section 80CCD(1B) |
- Total maximum tax deduction: ₹2 lakh per year.
- Employer’s contribution is tax-free, making NPS attractive for salaried employees.
Tax on Withdrawals (Maturity Taxation at 60 years)
| Withdrawal Type |
Tax Treatment |
| Lump sum withdrawal (60%) |
Tax-free |
| Mandatory annuity purchase (40%) |
Taxable as per income slab |
| Premature withdrawal |
Taxable, except in certain cases like illness or house purchase |
- Sovereign Gold Bonds (SGBs) | Tax-free on maturity after 8 years |
- NPS maturity withdrawals (60%) are tax-free, but 40% must be used for annuity, which is taxable.
Returns in NPS vs. Other Retirement Plans
| Investment |
Returns (p.a.) |
Tax Benefits |
Withdrawal Rules |
| NPS |
8-12% |
₹2 lakh deduction, partial tax-free withdrawals |
60% tax-free, 40% taxable |
| PPF |
7.1% |
EEE (Fully tax-free) |
Fully tax-free |
| Fixed Deposit |
6-7% |
Only 80C (no tax-free interest) |
Fully taxable |
| Mutual Funds (ELSS) |
12-15% |
80C (₹1.5L), LTCG taxed at 10% |
Fully taxable |
NPS vs. PPF
- NPS offers higher returns than PPF but comes with partial taxation on annuity.
- PPF is completely tax-free but has lower returns (~7.1%).
NPS Withdrawal Rules
| Withdrawal Type |
When Allowed? |
Amount |
| Partial Withdrawal |
After 3 years for specific reasons (education, marriage, house purchase, medical emergency) |
Up to 25% of own contribution |
| Full Withdrawal (Maturity at 60) |
After 60 years of age |
60% tax-free, 40% for annuity |
| Premature Exit (Before 60 years) |
After 10 years of investment |
20% lump sum taxable, 80% annuity (taxable) |
- Premature exit is restricted, ensuring funds are secured for retirement.
Annuity Options in NPS
Upon retirement, 40% of NPS corpus must be used for an annuity, providing a regular pension.
| Annuity Provider |
Expected Pension (per ₹1 Cr Corpus) |
| LIC Jeevan Akshay |
₹5-6 lakh per year |
| SBI Life - Annuity Plus |
₹4.8-5.5 lakh per year |
| HDFC Life Pension Guaranteed |
₹5-5.8 lakh per year |
- Annuities ensure a fixed post-retirement income but are taxable.
- Choosing the right annuity provider is critical for stable post-retirement earnings.
Is NPS a Good Investment for Retirement?
- Best for salaried employees due to employer contribution and tax benefits.
- Higher returns than PPF and FDs, making it suitable for long-term growth.
- Provides disciplined savings with restrictions on early withdrawals.
- Ideal for individuals seeking market-linked returns with stable pension income.
- Tax-efficient withdrawal structure with partial tax-free benefits.
Final Verdict: NPS is one of the best retirement investment options in India for long-term wealth creation and pension benefits.