NPS (National Pension System)
Government-backed retirement scheme regulated by PFRDA. Subscriber and (optionally) employer contribute to a market-linked corpus. At 60, 60% can be withdrawn tax-free and 40% must buy an annuity.
What is NPS (National Pension System)?
The National Pension System is a defined-contribution pension product regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is mandatory for central government employees who joined on or after 1st January 2004 and voluntary for everyone else aged 18 to 70. NPS has two account types: Tier 1 is the locked-in retirement account, and Tier 2 is a voluntary, withdrawable savings account. Contributions are invested across equity (E), corporate bonds (C), government securities (G), and alternative assets (A) based on the subscriber's choice or auto-allocation by age. Tax benefits include up to ₹1.5 lakh under Section 80CCD(1) within the 80C ceiling, an additional ₹50,000 under Section 80CCD(1B), and employer contribution up to 10% of basic + DA (14% for govt) deductible under Section 80CCD(2). At 60, 60% of the corpus can be withdrawn tax-free and 40% must be used to buy an annuity from an empanelled insurer.
Example
Vikram contributes ₹50,000 to NPS Tier 1 in FY 25-26 under Section 80CCD(1B), saving ₹15,600 tax in the 30% slab. His employer also adds 10% of basic = ₹60,000, fully deductible u/s 80CCD(2).
How NPS (National Pension System) is used
Open Tier 1 account via eNPS portal or PoP. Set monthly SIP, choose Active or Auto Choice, and claim 80CCD(1B) for the extra ₹50,000 deduction every year.
NPS (National Pension System) FAQs
What is the difference between NPS Tier 1 and Tier 2?
Tier 1 is the mandatory retirement account with lock-in until 60 and full tax benefits. Tier 2 is voluntary, has no lock-in or tax benefit (except for govt employees), and works like a flexible mutual fund account.
Is NPS better than EPF?
Both serve different goals. EPF gives a fixed interest rate (around 8.25% in 2026) with full tax-free maturity. NPS is market-linked, can deliver higher long-term returns, and offers an extra ₹50,000 deduction under 80CCD(1B), but mandates 40% annuity at 60.
Can I exit NPS before 60?
Yes, but conditions apply. Premature exit before 60 allows withdrawal of only 20% as lump sum (tax-free), while 80% must purchase an annuity. Exit is allowed after 5 years of contribution.