NPS - National Pension Scheme

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Zainab Hawa

Pension Income
Section 80CCD
Last updated on February 8th, 2024

The National Pension Scheme (NPS) is a retirement savings scheme initiated by the Government of India in 2004 that allows individuals to save for their retirement. The investor makes regular contributions to their pension account and is eligible to avail of various tax benefits under Income Tax Deductions. The account is administered by the Pension Fund Regulatory and Development Authority (PFRDA). Initially, the National Pension Scheme was only available to employees of the Central Government. However, later in 2009, the NPS scheme was opened to all sectors.

With NPS contribution, one can build a stable source of income for their retirement along with achieving high interest and tax benefits.

What is National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a voluntary pension scheme offered by the Government. Under this scheme, investors can make voluntary contributions to build a corpus for their retirement. It ensures individuals live with dignity and without compromising on their standard of living during their retirement phase. Hence, it aims at providing financial security and stability.

As per the NPS scheme, individuals invest in their pension accounts at regular intervals during their employment period. To provide social security/welfare to the employee, even the employer can co-contribute to the retirement account with the employee.

At maturity, the investor can withdraw a specified amount of the corpus after retirement, and the remaining amount will be receivable as a monthly pension.

The objectives of this scheme are:

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Features of the NPS Scheme

Types of NPS Accounts

Tier I and Tier II are the two main account categories under the NPS Scheme. Tier I is the default account while Tier II is a voluntary addition. Hence, one can’t hold a Tier II account unless they have a Tier-1 account.

The below table explains the accounts in detail:

ParticularsNPS Tier I AccountNPS Tier II Account
Minimum NPS contribution to open an account (initial contribution)INR 500INR 1,000
Minimum NPS Contribution p.a.INR 1000INR 250
Minimum Amount per ContributionINR 500INR 250
Maximum NPS Contribution p.a.No LimitNo Limit
Withdrawals withdrawal is restrictedwithdrawal is not restricted
Tax BenefitsTax deduction of up to INR 2 lakh p.a. u/s 80C & 80CCD
INR 1.5 lakh for Government Employees
Other employees – NA
StatusMandatory to openVoluntary

Note: An investor must maintain a minimum balance of INR 6000 at the end of the Financial Year in the Tier I account. There was a minimum balance requirement of INR 2000 in the Tier II account but that was removed by PFRDA in 2016. Hence, there are no minimum balance requirements for Tier II accounts now.

What is the NPS Withdrawal Process?

NPS Withdrawal after attaining the age of 60 years

As we know, the investor cannot withdraw the investment before the age of 60 years. Post attaining the age of 60 years, the investor can withdraw a maximum of 60% lump sum which will be exempt from tax. However, investor must retain at least 40% of the investment to receive a pension which will be taxable in the hands of the investor under ‘income from other sources’.

NPS Withdrawal before attaining the age of 60 years

In usual cases, since NPS is a pension scheme, investors cannot withdraw before attaining the age of 60 years. However, the investor can make an early withdrawal of up to 25% of the investment under certain circumstances provided that they have invested towards their account for 3 years. Below are the circumstances under which the early NPS withdrawal process is allowed:

The early withdrawal scheme allows for a maximum of 3 withdrawals and there must be a gap of a minimum of 5 years between each withdrawal.

The early withdrawal process only applies to Tier I account as Tier II account allows withdrawal of entire investment without any conditions.
The early withdrawal process only applies to Tier I account as Tier II account allows withdrawal of entire investment without any conditions.

Rules of Equity Allocation under the NPS Scheme

National Pension Scheme invests in several schemes one of them being equity. The significant benefit that comes with investing in the NPS scheme is that it allows its investors the freedom to select between two choices:

Note: The maximum amount that can be invested in Equity is 75% of your total investments.

Comparison between the NPS Scheme and other Tax Saving Schemes

The below table explains the difference between various investment schemes based on different criteria:

InvestmentInterestLock-in PeriodRisk Profile
NPS8% to 10% (expected)Till retirementMarket-related risks
ELSS12% to 15% (expected)3 YearsMarket-related risks
PPF7.1% (guarenteed)15 YearsRisk-free
FD7% to 9% (guaranteed)5 YearsRisk-free

NPS Tax Benefits

Below are the details for NPS tax benefit in the case of salaried individuals and self-employed individuals:

Tax benefit for Salaried Individuals:

CategorySectionTax Benefits
Own Contribution Section 80CCD(1)10% of Salary up to INR 1.5 lakh
Employer ContributionSection 80CCD (2)10% of the salary in case of other employees and 14% of the salary in case of central government employees
Additional ContributionSection 80CCD(1B)This section was introduced in 2015, in order to provide an additional deduction of up to INR 50,000 on the amount contributed to NPS

 Tax benefit for Self-Employed Individuals:

CategorySectionTax Benefits
Own Contribution Section 80CCD(1)20% of Gross Annual Income up to INR 1.5 lakh
Additional ContributionSection 80CCD(1B)INR 50,000

Note: The tax benefits are available only in the case of the Tier I account and not in the Tier II account.

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How to open an NPS Account? 

An individual can open an NPS account in two different ways i.e., Online & Offline

Online Process

The steps for online registration are:

  1. Go to the eNPS website and select new registration

    Choose Aadhaar or PAN as an option to perform the KYC verification

  2. Enter Aadhaar / PAN details

    Enter the OTP to start the registration process

  3. Fill up all the mandatory details

    Along with other details, you will have to upload your digital photograph and scanned signature

  4. Make a payment toward the NPS account

    You can do this using your Debit/Credit Card or Internet Banking

  5. If you started the registration process via Aadhaar

    You can eSign your application and complete the registration process. No need to send the physical copy of a form to CRA.

  6. In case you chose PAN

    Finally, you need to select the ‘Print & Courier’ option, take the printout of the filled form, affix your photograph, and send it to NSDL e-Governance Infrastructure Limited. 

Offline Process

You can also do this offline by submitting the form and KYC documents in person:

  1. Download the Permanent Retirement Account Number (PRAN) Application Form
  2. Fill in the mandatory details, affix the photograph and signature & scheme preference details.
  3. Submit the Application form along with your address proof and ID proof to your nearest Point of presence-Service Provider
  4. Upon submission, the Point of Presence-Service Provider (POP-SP) shall give you a receipt number which you can use to track your PRAN Application Status

You have to make the first contribution at the time of applying for registration to any POP-SP. For this, you have to submit an NCIS (Instruction Slip) mentioning the payment details.

Note: When you join NPS, you’ll be allotted a Permanent Retirement Account Number- PRAN; a 12-digit unique ID number. In case you misplace your PRAN card or it gets stolen, it can be reprinted with additional charges. Furthermore, this unique PRAN can be used from any location in India. However, you must have your PRAN number.

Benefits of NPS

What Documents are Required to Open an NPS Account?

Mentioned below is a list of documents:


Is contribution to NPS mandatory for salaried employees?

No. Unlike contributions to the Employee Provident Fund, the NPS contribution is completely voluntary. It is up to the employee whether he wants to invest in NPS or not. Even a self-employed person can open an NPS account and make voluntary investments in the account.

What is the difference between a Tier I and Tier II account?

The basic difference between both accounts is that withdrawals are not allowed until the investor reaches the age of 60 in the Tier I account, while in Tier II, the investor can withdraw from his balance anytime he wants. Moreover, there are no tax deductions under Tier II while Tier I offers various tax benefits.

Can I appoint a nominee for an NPS account? 

Yes, you need to appoint a nominee when opening the NPS account. You can appoint up to 3 nominees for your NPS Tier I and Tier II accounts. However, in case of more than one nominee, you need to specify the percentage of your maturity amount that you wish to allocate to each nominee. The total share percentage across all nominees should aggregate to 100%.

Can NRIs opt for the National Pension Scheme?

Yes, NRIs between the age of 18-60 years can invest under the National Pension Scheme.

What will happen if I don’t make the minimum contribution?

If you do not contribute the minimum amount, your account will be frozen. You can unfreeze the account by visiting the POP and pay the minimum required amount along with a penalty of INR 100.