National Pension Scheme (NPS)

What is the National Pension Scheme (NPS)?

National Pension Scheme (NPS) is a government sponsored retirement savings scheme and is regulated by Pension Fund Regulatory and Development Authority (PFRDA). It was launched by Government of India on 1st January 2004. It is aimed at assisting people in building retirement corpus in a structured manner through regular contributions.

NPS is mandatory for most Central Government employees who joined service on or after 1 January 2004, except for certain categories such as members of the Armed Forces. Most State Governments have also adopted the scheme for their employees. In addition, eligible Indian citizens, including resident Indians, NRIs, and OCIs, can join NPS voluntarily. Employers can also adopt NPS as a retirement benefit scheme for their employees.

NPS Calculator

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18 Years 59 Years

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Types of National Pension Scheme Account

The National Pension Scheme (NPS) has two types of accounts to satisfy various financial requirements. Tier I is the main retirement account that does not allow withdrawals. Tier II Account is a savings account available as an optional but more liquid account.

1. Tier I Account

   The Tier I NPS Account is the mandatory retirement account under NPS. It is designed to help subscribers build a retirement corpus through regular contributions. The account remains locked until retirement, although partial withdrawals of up to 25% of the subscriber's own contributions are permitted after three years for specified purposes, such as higher education, marriage, purchasing or constructing a house (subject to conditions), or treatment of specified illnesses.

2. Tier II Account

   The Tier II NPS Account is an optional savings account that can be opened only after a Tier I Account. It offers flexibility. It also allows subscribers to withdraw funds without time restrictions. Although it does not generally provide tax benefits. It can be used for short-term financial goals.

Investment Choice in NPS

Contributions under the NPS get diversified across asset classes, equity (E), corporate debt (C), government securities (G), and alternative investment funds (A) among them. Depending on how much investing knowledge a subscriber has and their comfort level with risk, either Auto Choice or Active Choice can be picked.

1. Auto Choice

   With Auto Choice, there's no need to actively manage anything, asset allocation adjusts on its own as the subscriber's age changes. Early on, equities take up a larger share of the investment, but as the years go by, the balance tilts increasingly toward debt instruments considered relatively safer. Anyone who would rather not get too involved in the day-to-day of investing tends to find this option a better fit.

2. Active Choice

   In Active Choice, subscribers themselves decide how contributions get divided among the available asset classes. Up until the age of 50, as much as 75% of the portfolio can go into equities. Past that point, the maximum equity allocation permitted starts tapering off gradually, in line with PFRDA guidelines. This route tends to suit those who want to assess their investment strategy on a regular basis.

Benefits of the National Pension Scheme (NPS)

The National Pension Scheme (NPS) has the following features which make it popular for long-term retirement planning.

• Low Cost: NPS is one of the lowest cost pension schemes and enables subscribers to maximise their long term savings.
• Flexible Investment Options: Subscribers may select their Pension Fund Manager, their Point of Presence (PoP), their Central Recordkeeping Agency (CRA) as well as the investment option. The selections are subject to change according to the rules as applicable.
• Portable Account: NPS account shall be portable even if a subscriber changes his/her job or address within India.
• Tax benefits: Tax deductions are allowed in accordance with the provisions of the Income-tax Act, 2025 on the contributions made to the Tier I account.
• Market-Linked Returns: Investments are managed by professional pension fund managers. The returns are linked to the market returns and are not guaranteed.
• Transparent scheme: The subscribers can access their accounts online, monitor the contributions and the performance of the investment at any point in time.

Eligibility Criteria for National Pension Scheme

The National Pension Scheme (NPS) is open to all eligible citizens of India subject to the age limit and prescribed KYC requirements. It is accessible to all types of people such as Salaried Employee, SE (Self-employed), Non-Resident Indian (NRI) under applicable regulations. Eligible subscribers include:

• Resident Indian citizens.
• Non-Resident Indians (NRIs), in compliance with RBI and FEMA guidelines.
• Salaried employees from the government, private sector, and organised or unorganised sectors.
• Self-employed individuals seeking to build a retirement corpus.
• Individuals who meet the prescribed age and KYC requirements under the NPS framework.

Documents Required to Open an NPS Account

To open a National Pension scheme (NPS) account, subscribers need to submit KYC and address proof documents for identity verification. The documents required may vary depending on the registration method and Point of Presence (PoP) requirements.

• Aadhaar Card
• PAN Card
• Valid Driving License
• Passport
• Bank account statement/passbook (as applicable)
• Certificate of Identity with photograph signed by an MP or MLA
• NREGA job card duly signed by a State Government officer
• Certificate issued by the PoP bank for an existing bank customer
• Latest electricity, water, telephone, property, or house bill in the subscriber’s name (less than 3 months old)

How to Open an NPS Account

An NPS account can be created via either online or offline routes. Eligible individuals can register via the authorised banks, digital platforms or other points of presence (PoPs) authorised by the Pension Fund Regulatory and Development Authority (PFRDA).

1. Open an NPS Account Online

   The online process is quicker, and can be completed directly via participating banks, the eNPS portal or other authorised digital portals.

   • Choose an Online Platform: Visit the eNPS portal, your bank's internet banking portal, or an authorised investment platform.
   • Complete KYC Verification: Verify your identity using Aadhaar, PAN, or other accepted KYC documents.
   • Fill the Registration Form: Enter personal, contact, and nominee details accurately.
   • Select Investment Preferences: Choose your Pension Fund Manager (PFM), investment option (Active or Auto Choice), and asset allocation.
   • Make the Initial Contribution: Pay the minimum required contribution through the available online payment methods.
   • Receive PRAN: After successful registration, your Permanent Retirement Account Number (PRAN) is generated and your NPS account becomes active.

2. Open an NPS Account Offline

   NPS also has offline account opening facility. For offline registration people can visit an authorised point of presence (PoP). The main steps involved are as follows:

   • Visit an Authorised PoP: Go to the nearest participating bank branch or other PFRDA-authorised Point of Presence.
   • Take the Application Form: Take the NPS subscriber registration form at the service centre.
   • Enter the Details to be Filled: Fill in the application form with correct personal, contact and nominee details.
   • Provide KYC Documents: You are required to submit identity, address and age proof documents.
   • Make the First Contribution: Deposit the minimum contribution along with the accepted mode of payment.
   • Get PRAN: After the processing and verification of the application, PRAN is issued and the NPS account is activated.

What is the Withdrawal Process Under the National Pension Scheme?

The National Pension Scheme (NPS) has varied rules when a subscriber withdraws their pension at retirement, before retirement or in case of death.

1. Withdrawal on Retirement (At Age 60)

   When a subscriber reaches the normal exit age, eligible subscribers with pension wealth above ₹12 lakh may withdraw up to 80% of the accumulated corpus as a lump sum, with at least 20% used to purchase an annuity. Pension wealth up to ₹8 lakh may be withdrawn entirely, while pension wealth between ₹8 lakh and ₹12 lakh is governed by the applicable PFRDA exit rules. 

2. Premature Exit (Before Age 60)

   In case of premature exit, up to 20% of the accumulated pension wealth can generally be withdrawn as lump sum, while at least 80% must be utilised for annuity purchase. If the accumulated pension wealth is ₹5 lakh or less in case of premature exit, the subscriber may withdraw the entire corpus as lump sum or use other permitted withdrawal options.

3. Withdrawal on Death of the Subscriber

   In the event of the subscriber's death, the entire accumulated corpus is paid to the nominee or legal heirs, subject to the applicable NPS rules. As a general rule, the claim has to be accompanied by documents like death certificate, identification proof of the beneficiary and other documents as prescribed by the Central Recordkeeping Agency (CRA).

Tax Benefits Under the National Pension Scheme (NPS)

National Pension Scheme (NPS) provides several tax benefits under the Income-tax Act, 2025 and is a tax-efficient retirement savings scheme. The contribution to the mandatory Tier I Account is eligible for various sections of deductions and a decent portion of retirement corpus can be taken without being taxed on maturity.

Tax Benefits at Maturity

On reaching the eligible exit age, up to 60% of the accumulated corpus withdrawn as a lump sum is tax-exempt under Schedule II of the Income-tax Act, 2025 (earlier Section 10(12A)). Eligible subscribers with pension wealth above ₹12 lakh may withdraw up to 80% as a lump sum under PFRDA's exit rules, but the portion beyond 60% is not currently covered by this tax exemption and remains taxable at the applicable slab rate unless the tax law is amended. The balance is generally used to purchase an annuity. 

NPS Calculator

The NPS Calculator helps you estimate your retirement corpus and monthly pension under the National Pension Scheme. This is an online tool, made specifically for this kind of retirement planning. You will need to supply some information like your current age, how much you contribute each month, the age you expect to retire at, and the estimated rate of return. 

It provides an estimate of the accumulated corpus, the eligible lump sum withdrawal, the annuity amount, and the expected monthly pension. All based on the annuity assumptions selected. This helps compare different pension plans side by side, making it that much easier to plan retirement savings with more clarity. 

Key Takeaways

The National Pension Scheme (NPS) is a government sponsored scheme and is regulated by Pension Fund Regulatory and Development Authority (PFRDA). It provides a systematic way for individuals to create a retirement corpus via periodic investments. The returns are linked with the market. Apart from this, the subscribers also get tax benefits and the flexibility to choose their own investments. There are two types of accounts (Tier I and Tier II) each catering to different financial needs. Together, these features help subscribers work toward a steady income stream in retirement and long-term financial security.