Blog Details


What is NPS & How does it Work?

National Pension Scheme

The Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government administer the National Pension Scheme (NPS) India, which is a voluntary long-term investment plan for retirement. For a better understanding, we will cover the same in this piece -

What is NPS (National Pension Scheme)?

The National Pension Scheme is a government-sponsored social security programme. Except for individuals in the military forces, this pension programme is open to employees from the public, private, and even unorganized sectors. The programme encourages employees to contribute to a pension account at regular intervals throughout their employment. Subscribers can withdraw a set amount of the corpus after they retire. After you retire, the remaining amount will be paid to you as a monthly pension if you have an NPS account. Previously, the NPS plan only applied to employees of the Central government. The PFRDA has now made it available to all Indian people on a voluntary basis. For anyone who works in the private sector, the NPS plan is quite advantageous. An NPS account can be opened by any Indian citizen between the ages of 18 and 65. An NPS account can also be opened by a non-resident Indian.

What are the types of NPS Accounts?

Tier I and tier II accounts are the two most common NPS account kinds. The first is the default account, and the second is an optional addition. The two account kinds are explained in detail in the table below –

Tier I
Tier II
Minimum Contribution
?500 p.m or ?1000 p.a.
Maximum Contribution
No limit
No limit

Not allowed on regular basis

Tax Benefits

Up to ? 2 lakhs p.a.(Under 80C and 80CCD)

?1.5 lakhs for government employees

Other employees-None

What are the Features of investing in NPS?

1. Rules for Early Withdrawal and Exit - It is essential that you continue to invest in your pension plan until you reach the age of 60. If you have been investing for at least three years, you may withdraw up to 25% for specific reasons. These include, among other things, children's weddings or higher education, building/buying a house, or self/family medical treatment. During your tenure, you can withdraw up to three times (with a five-year break between each withdrawal). Only tier I accounts are subject to these restrictions; tier II accounts are not.

2. Returns - A portion of the NPS is invested in stocks (this may not offer guaranteed returns). It does, however, provide significantly better returns than other classic tax-saving investments such as the PPF. This scheme has been in place for more than a decade and has produced annualized returns of 8% to 10%. If you are unhappy with the fund's performance, you have the option of changing your fund manager in NPS.

3. Equity Allocation Rules - The NPS invests in a variety of schemes, with Scheme E focusing on equity. A maximum of 50% of your investment can be allocated to equities. There are two types of investments to consider: auto choice and active choice. According to your age, the auto decision determines the risk profile of your assets. For example, as you get older, your investments become more steady and less risky.
You can choose the scheme and divide your money with active choosing.

4. Rules for Withdrawal After 60 - You cannot withdraw the entire corpus of the NPS system after retirement, contrary to popular assumption. In order to obtain a regular pension from a PFRDA-registered insurance firm, you must set aside at least 40% of your corpus. The remaining 60% is currently tax-free. According to the most recent government announcement, the whole NPS withdrawal corpus is tax-free.

5. Tax Benefits - For NPS, you can claim a deduction of up to ?1.5 lakhs - for both your contribution and the employer's contribution. Self-contribution, which is a part of Section 80C, is covered by 80CCD(1).
The maximum deduction allowed under section 80CCD(1) is 10% of the salary, but no more than that. This ceiling is set at 20% of gross income for self-employed taxpayers. The employer's NPS payment is covered under Section 80CCD(2), which is not included in Section 80C. Self-employed taxpayers are not eligible for this benefit. The lowest of the following amounts is the maximum amount that can be deducted:
Employer's actual NPS contribution is 10% of basic + DA gross total income. You can claim any additional self-contribution (up to ? 50,000) as an NPS tax advantage under section 80CCD(1B).
As a result, the scheme allows for a total tax reduction of up to ? 2 lakhs.

6. Voluntary account - It is not necessary to have a Tier II account with the National Pension Scheme. Tier 1 account holders are eligible to open Tier II accounts.

How to open a NPS Account?

An NPS account can be opened in one of two ways:
1. By going to a POP-SP (point of presence service provider), such as a bank or post office.
2. Online utilizing your PAN and bank account information on the eNPS website.

To add in, Each NPS participant is given a PRAN (Permanent Retirement Account Number). If you want to open an account physically, you can go to your nearest POP-SP and submit the PRAN application together with your KYC documents. PRAN card will be mailed to correspondence address once PRAN is issued.

For Online Mode, You can register for a National Pension System account online at Choose the Aadhaar authentication option for eSign. Alternatively, one can fill out the online form with the relevant information, print it, place the most recent photograph on it, sign it, and submit it to the CRA.

Recent Updates

Section 194P was recently added to ensure that banks withhold tax from pension and interest income received by senior citizens over 75 years of age. Outcome of the Union Budget 2021: It has been proposed to exempt senior individuals from submitting income tax returns if their sole annual income sources are pension and interest income.


As a result, if the foregoing benefits match your risk profile and investment aim, you should consider investing in the NPS scheme. If you want more equity exposure, however, there are many mutual funds that appeal to investors from many walks of life.

- Team IFA