The National Pension System (NPS) has become a structured retirement planning option in India. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), it provides a framework for systematic savings while offering flexibility in contributions and investments.
With updates introduced in 2025, including the launch of the Unified Pension Scheme (UPS), understanding NPS is essential for individuals planning long-term financial stability.
Understanding the National Pension System
The National Pension System is designed to encourage individuals to build a retirement corpus during their working years. It is open to citizens in both the organised and unorganised sectors (except the armed forces).
Subscribers contribute regularly to their NPS accounts, and at retirement, a portion of the accumulated corpus can be withdrawn, while the remaining must be used to purchase an annuity. This ensures a combination of lump sum and steady pension income post-retirement.
NPS Registration Process
NPS registration is simple and can be completed online. Linking a PAN, Aadhaar, and mobile number is essential for the process. Once the application is verified through OTP, a Permanent Retirement Account Number (PRAN) is generated, which serves as the unique identity for NPS login and account management.
NPS accounts are categorised into:
- Tier I Account: Mandatory retirement-focused account.
- Tier II Account: An Optional voluntary savings account available to Tier I subscribers.
Eligibility Criteria
Anyone meeting the following conditions can open an NPS account:
- Must be an Indian citizen (resident or non-resident) or an NRI.
- Age should be between 18 to 70 years.
- Must comply with KYC norms and be legally competent to contract.
- HUFs, PIOs, and OCIs are not eligible.
- NPS is an individual pension account and cannot be opened on behalf of another person.
Additionally, NPS Vatsalya allows parents to open accounts for their minor children until they turn 18, after which the account can be managed independently.
Features of NPS
Here are some of the best features of the National Pension System:
Flexibility
Subscribers can contribute at any time during the year, choose their investment preferences, and even change fund managers. The account is portable across jobs and locations.
Investment Choices
- Active Choice: Investors decide how much to allocate between equity, debt, and bonds.
- Auto Choice: Allocation is based on the age of the subscriber, with risk levels adjusted accordingly.
Equity Allocation
Equity exposure is capped in the range of 50% to 75% depending on age and subscriber type. For government employees and senior citizens, the cap remains at 50%.
NPS Returns
Unlike traditional savings instruments, nps returns are market-linked. They are influenced by factors such as equity allocation, fund manager performance, economic conditions, and duration of investment. While there is no fixed interest rate, NPS has historically demonstrated competitive returns over long horizons.
Subscribers can estimate expected earnings using available NPS returns calculators, which project potential growth based on contribution patterns and allocation preferences.
NPS Tax Benefit and Exemptions
One of the reasons NPS attracts broad participation is its tax advantages.
Tax Deductions for Tier I Contributions
- Self-contributions are eligible for deductions under Section 80CCD(1), subject to limits.
- An additional deduction is available under Section 80CCD(1B).
- Employer contributions qualify for deduction under Section 80CCD(2), within prescribed limits.
- For self-employed individuals, deductions are available based on gross income under Section 80CCD(1).
NPS Tier II Account Deductions
- Contributions are eligible for Section 80C deduction if there is a three-year lock-in.
- The combined ceiling of deductions applies.
- These deductions cannot be availed under the new regime.
NPS Tax Exemption on Withdrawals
- Partial withdrawal: Up to 25% of self-contribution, subject to conditions, is exempt under Section 10(12B).
- Lump sum withdrawal: At retirement, up to 60% of the corpus can be withdrawn tax-free.
- Annuity purchase: The amount used to buy annuities is exempt under Section 80CCD(5). However, annuity income is taxed later under Section 80CCD(3).
These provisions ensure that the NPS tax benefit and NPS tax exemption extend across contributions, withdrawals, and annuity allocations.
NPS Withdrawal Rules
Withdrawal flexibility is one of the key features of NPS. The rules vary depending on the situation:
- Upon retirement: Up to 60% of the corpus can be withdrawn as a lump sum, with at least 40% allocated to annuity purchase. Withdrawals can also be structured at regular intervals.
- Premature exit: Before superannuation, 80% of the corpus must go into annuity, while 20% can be withdrawn. If the corpus is below the prescribed limit, complete withdrawal is allowed.
- On the death of the subscriber: The whole corpus is transferred to the nominee or legal heir.
- Tier II account: Can be withdrawn anytime, as there is no lock-in period.
These NPS withdrawal rules provide flexibility while ensuring that retirement planning objectives remain intact.
NPS vs Unified Pension System (UPS)
With effect from April 2025, the government introduced the Unified Pension Scheme (UPS). It is available to central government employees and retired NPS subscribers, who may migrate if they choose.
- NPS offers market-linked NPS returns without guaranteeing a fixed payout.
- UPS guarantees a minimum monthly pension, extending all tax benefits available to NPS after completion of a specific number of years.
Subscribers need to weigh the flexibility of NPS against the security of UPS while deciding their retirement strategy.
Conclusion
The National Pension System continues to be a flexible and structured retirement planning tool, offering market-linked NPS returns, tax benefits, and defined NPS withdrawal rules. With simple NPS registration, clear tax exemptions, and the option to compare with UPS, it provides individuals with multiple choices to build long-term financial security while balancing growth and stability.
Frequently Asked Questions
1. Who can open an NPS account?
Any Indian citizen between 18 and 70 years, including NRIs, can open an NPS account subject to KYC compliance.
2. Is NPS registration complicated?
No, the process is straightforward and can be completed online using Aadhaar, PAN, and a mobile number, which generates a PRAN for account management.
3. What tax exemptions are available at withdrawal?
At retirement, up to 60% of the corpus withdrawn is exempt, while the annuity purchase portion is exempt at the time of purchase but taxable when received as income.
4. Can I withdraw from my NPS account before retirement?
Yes, under premature exit, 80% of the corpus must be used for annuity purchase. However, if the total corpus is less than or equal to ₹2.5 lakh the NPS subscriber can opt for 100% lumpsum withdrawal.
5. How are NPS returns calculated?
NPS returns are market-linked and depend on factors such as asset allocation, fund manager performance, and the length of the investment period.