National Pension Scheme: Features, Tax Benefits, Eligibility, Returns

What is the National Pension Scheme?

The National Pension Scheme (NPS), also known as the National Pension System, is a government-sponsored, voluntary, and long-term retirement savings scheme in India. Launched in 2004 initially for government employees, it was later opened to all Indian citizens, including those in the private and unorganized sectors, as well as non-resident Indians. The scheme is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013.

NPS is a market-linked, defined contribution retirement scheme regulated by the PFRDA, where returns depend on the performance of investments in a diversified portfolio of equities, government securities, corporate bonds, and alternative assets, all managed by professional fund managers. Subscribers can select their asset allocation and fund manager, or opt for an “Auto Choice” that adjusts allocation by age. The scheme offers two types of accounts: Tier-I, a primary retirement account with withdrawal restrictions, and Tier-II, a voluntary savings account with flexible withdrawals. NPS also provides tax benefits under Sections 80C and 80CCD(1B), making it a great option for systematic retirement planning and long-term financial security

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What is the Eligibility Criteria of the National Pension Scheme?

• Must be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).

• Age should be between 18 and 70 years at the time of joining.

• The applicant must comply with Know Your Customer (KYC) norms as specified in the application form.

• The individual should be legally qualified to execute a contract under the Indian Contract Act.

• NPS accounts are strictly individual and cannot be opened on behalf of another person.

• Overseas Citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.

Interest Rate of National Pension Scheme

As of 2025, the average NPS interest rate ranges between 9% and 12% per annum, with some asset classes and fund managers delivering even higher short-term returns. The National Pension Scheme (NPS) does not offer a fixed interest rate; instead, returns are market-linked and depend on the performance of the underlying investments, such as equities, government securities, and corporate bonds. Over the past decade, NPS has consistently delivered returns in this 9%-12% range, making it a competitive option for long-term retirement planning.

Features and Benefits of the National Pension Scheme 

Below are the features and benefits of NPS: 

1. Attractive Returns

   • NPS has delivered 11% to 20% annualised returns over the past decade.

   • Although it doesn’t guarantee a fixed return, it has historically outperformed many other tax-saving investment options.

2. Equity Allocation with Risk Management

   • Equity exposure is capped between 50% to 75%, offering growth potential with risk control.

   • For government employees and senior citizens, the cap is fixed at 50%.

3. Two investment choices:

   • Auto Choice: Investment mix adjusts with your age, more conservative as you grow older.

   • Active Choice: Freedom to decide your equity-debt ratio and schemes.

4. High Flexibility

   • Invest anytime during the financial year with no fixed frequency.

   • Change your fund manager and switch between investment options.

   • Fully online and portable across jobs and locations, making it ideal for today’s mobile workforce.

5. Convenient Withdrawal Options

   • At retirement (60 years or superannuation):

   • Withdraw up to 60% of the corpus tax-free, and invest the remaining 40% in an annuity plan.

   • Flexible withdrawal frequency: monthly, quarterly, half-yearly, or yearly.

   • If the total corpus is up to ₹5 lakh, full withdrawal is allowed without annuity.

6. Premature Exit:

   • Before retirement, 80% must go into an annuity, unless the total corpus is ≤ ₹2.5 lakh, in which case full withdrawal is permitted.

   • In case of death, 100% of the corpus is paid to the nominee/legal heir.

Tax Advantages of the National Pension Scheme 

1. Tax Benefits for Self-Contribution

   For Salaried Employees:

   • Section 80CCD(1): Deduction of up to 10% of salary (Basic + DA), capped at ₹1.5 lakh under Section 80CCE.

   • Section 80CCD(1B): Additional deduction of up to ₹50,000 over and above the ₹1.5 lakh limit.

   Note: These benefits are only available under the old tax regime.

2. Tax Benefits on Employer’s Contribution

   • Section 80CCD(2): Deduction of up to 10% of salary (Basic + DA). 

   • For Central Government employees, this goes up to 14%, available under both tax regimes.

3. Tax Benefits for Self-Employed Individuals

   • Section 80CCD(1): Deduction of up to 20% of gross income, limited to ₹1.5 lakh under Section 80CCE.

   • Section 80CCD(1B): Additional deduction of ₹50,000.

   Note: These deductions are only applicable under the old tax regime.

4. Tax Benefits on Withdrawal

   • Partial Withdrawal: Tax-free up to 25% of self-contribution, subject to conditions under Section 10(12B).

   • Lump Sum Withdrawal at Retirement (60 years): 60% of the total corpus is tax-exempt under Section 10. 

5. Tax Benefit on Annuity Purchase

   • Section 80CCD(5): Exemption on the amount used to purchase an annuity post-retirement.

   • However, income from the annuity is taxable under Section 80CCD(3).

National Pension Scheme Tier I and Tier II Account

Below is the difference between NPS Tier I and Tier II accounts: 

How to Open a National Pension Scheme Account?

You can open an NPS account online or offline, based on your preference:

1. Online Method (Through eNPS Portal)

   Step by Step Process:

   • Visit the official eNPS portal.

   • Click “Register” and select your category (Individual/Corporate).

   • Enter details: PAN/Aadhaar, mobile number, bank details, etc.

   • Choose your Pension Fund Manager and investment option (Auto or Active).

   • Upload required documents (photo, signature, etc.).

   • Make your initial contribution (minimum ₹500).

   • On successful registration, you'll receive your Permanent Retirement Account Number (PRAN).

   Note: Aadhaar-based e-sign or OTP is used for verification.

2. Offline Method (Through POP-SPs)

   Point of Presence Service Providers (like banks or post offices):

   • Visit the nearest authorised POP-SP branch.

   • Fill and submit the NPS Registration Form.

   • Provide KYC documents (ID proof, address proof, photo).

   • Make the initial contribution (minimum ₹500).

   • Your PRAN will be issued and sent to your address.

How are NPS Returns Calculated?

You can calculate returns on your NPS account by using the NPS calculator. An NPS calculator is a handy online tool that helps individuals estimate their potential pension. Users input their relevant financial information into the calculator, and it generates an estimate of the pension they may receive during retirement through their NPS account. These calculators are designed to assist people in planning and making informed decisions about their retirement savings and income.

National Pension Scheme Customer Care

• Call Centre Number for NPS: 1800 110 708

• SMS Number for NPS: NPS to 56677

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

Conclusion

NPS stands out as an efficient pension plan for long-term retirement planning, combining flexibility, transparency, and attractive tax advantages. By promoting disciplined savings and offering market-linked returns, the scheme empowers individuals to build a substantial retirement corpus and ensures a steady income after retirement. With its wide accessibility and regulatory oversight, NPS continues to play an essential role in addressing the challenge of old-age financial security in India.