National Pension Scheme:
Definition, Types, Benefits & Comparison

The National Pension Scheme (NPS) is a government-backed, defined-contribution pension system in India that allows individuals to build a retirement corpus through systematic, long-term investments during their working years. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the Ministry of Finance, NPS was introduced on January 1, 2004, initially for Central Government employees (except armed forces) and later opened to all Indian citizens, including NRIs and Overseas Citizens of India (OCIs), in 2009.

NPS operates as a voluntary, market-linked retirement savings scheme where subscribers contribute regularly to their Individual Pension Account. These contributions are invested across multiple asset classes—equity (E), corporate debt (C), government securities (G), and alternative investment funds (A)—with the aim of generating market-linked returns. Upon retirement or reaching the age of 60, subscribers can withdraw a portion of the accumulated corpus as a lump sum, while the remaining amount must be used to purchase an annuity plan that provides regular monthly pension income.

The scheme is structured into two account types: Tier-I, which is the primary retirement-focused pension account with withdrawal restrictions and tax benefits, and Tier-II, an optional voluntary savings account with no withdrawal restrictions but without the tax advantages of Tier-I. NPS subscribers receive a unique 12-digit Permanent Retirement Account Number (PRAN) that remains with them throughout their lifetime and is portable across jobs, sectors, and locations.

Related terms: PFRDA, PRAN, Tier-I account, Tier-II account, annuity, pension fund manager

Any Indian citizen, whether resident or non-resident, and Overseas Citizens of India (OCI) cardholders aged between 18 and 70 years can open an NPS account. The subscriber must comply with Know Your Customer (KYC) norms and be legally competent to execute a contract as per the Indian Contract Act. As of August 2021, PFRDA increased the maximum entry age from 65 to 70 years, and subscribers can continue or defer their account up to the age of 75 years.

However, certain entities are not eligible to subscribe to NPS. Hindu Undivided Families (HUFs), Persons of Indian Origin (PIOs), and individuals of unsound mind or undischarged insolvents cannot open NPS accounts. NPS is an individual pension account and cannot be opened on behalf of a third person. Additionally, if a non-resident changes their citizenship status, their NPS account will be closed.

NPS is mandatory for Central Government recruits who joined on or after January 1, 2004 (except armed forces), and has been adopted by most State Governments for their employees. For all other Indian citizens, NPS subscription is voluntary and can be held alongside other pension schemes such as EPF, PPF, Superannuation Fund, or Provident Fund.

NPS offers two distinct account types: Tier-I and Tier-II. The Tier-I account is the primary Individual Pension Account designed specifically for retirement planning. It is mandatory for government employees covered under NPS and optional for other subscribers. Tier-I requires a minimum contribution of Rs. 500 to open the account and a minimum annual contribution of Rs. 1,000 to keep it active. Withdrawals from Tier-I accounts are restricted and governed by specific exit and withdrawal regulations. This account is eligible for tax benefits under Sections 80C, 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act. Account Management Charges (AMC) apply to Tier-I accounts, and there is no provision to switch funds from Tier-I to Tier-II.

The Tier-II account is an optional voluntary savings account that can only be opened by subscribers who have an active Tier-I account. It requires a minimum contribution of Rs. 250 to open with no minimum annual contribution requirement. Unlike Tier-I, the Tier-II account offers unrestricted withdrawals at any time, functioning more like a regular investment account. However, it does not provide tax benefits except for Central Government employees who can claim deductions under Section 80C with a 3-year lock-in period. No separate AMC charges apply to Tier-II accounts, and subscribers can switch funds from Tier-II to Tier-I (one-way switch) at any time.

Upon closure of the Tier-I pension account, any balance outstanding in the Tier-II account will be simultaneously withdrawn and transferred to the subscriber's bank account. Subscribers can select different Pension Funds and investment options for their Tier-I and Tier-II accounts independently.

NPS provides substantial tax benefits that make it one of the most tax-efficient retirement savings instruments in India. Under Section 80CCD(1), salaried subscribers can claim a tax deduction of up to 10% of their salary (Basic + Dearness Allowance) subject to the overall ceiling of Rs. 1.5 lakh under Section 80CCE. For self-employed individuals, this deduction is available up to 20% of gross income, again within the Rs. 1.5 lakh limit. These deductions fall within the same overall limit that covers investments under Section 80C, 80CCC, and 80CCD(1).

The most significant advantage of NPS is the additional exclusive deduction under Section 80CCD(1B), which allows subscribers to claim up to Rs. 50,000 over and above the Rs. 1.5 lakh limit under Section 80CCE. This brings the total potential tax deduction from NPS contributions to Rs. 2 lakh per year. Employer contributions to NPS are also eligible for tax deduction under Section 80CCD(2) up to 10% of salary (Basic + DA) in the Old Tax Regime and 14% in the New Tax Regime for private sector employees. For Central Government employees, the employer contribution deduction is 14% regardless of the tax regime chosen.

At the time of exit, NPS offers favorable tax treatment. Up to 60% of the accumulated corpus can be withdrawn as a tax-free lump sum under Section 10(12A), while the remaining 40% used for purchasing an annuity is exempt under Section 80CCD(5). Partial withdrawals of up to 25% of self-contributions are tax-exempt under Section 10(12B), subject to conditions prescribed by PFRDA. However, the pension income received from the annuity after retirement is taxable as per the subscriber's applicable income tax slab under Section 80CCD(3). Additionally, no Goods and Service Tax (currently 1.8%) is applicable on annuity plans purchased through NPS on exit. It is important to note that NPS Tier-II accounts do not offer these tax benefits, except for Central Government employees with a 3-year lock-in period who can claim deductions under Section 80C.

Yes, NPS allows partial withdrawals from the Tier-I account before retirement under specific circumstances. After completing 3 years of investment, subscribers can make partial withdrawals of up to 25% of their own contributions for specified reasons. These reasons include higher education of children, marriage of children, purchase or construction of residential house or flat, treatment of specified illnesses, disability of more than 75%, skill development or re-skilling activities, establishment of own venture or startups. Subscribers can make a maximum of 3 partial withdrawals during their entire tenure in NPS, with each withdrawal spaced at least 5 years apart. These partial withdrawals are tax-exempt under Section 10(12B).

Premature exit from NPS is also possible, but it comes with restrictions. If a subscriber exits after completing 5 years but before reaching 60 years of age, they can withdraw a maximum of 20% of the corpus as a lump sum, while a minimum of 80% must be used to purchase an annuity. However, if the total accumulated corpus is less than Rs. 5 lakh (increased from Rs. 2.5 lakh as per PFRDA Circular dated June 14, 2021), the subscriber can withdraw the entire amount without purchasing an annuity, though 40% of this amount will be taxable.

The Tier-II account offers complete flexibility with unrestricted withdrawals permitted at any time without any lock-in period or withdrawal restrictions. Subscribers can also transfer funds from Tier-II to Tier-I account through a one-way switch option.

Upon reaching the age of 60 (considered the normal superannuation age in NPS), subscribers have several options for managing their accumulated pension corpus. For government employees, they can withdraw up to 60% of the total corpus as a tax-free lump sum under Section 10(12A), while the remaining 40% must be used to purchase an annuity plan from any of the PFRDA-empanelled Annuity Service Providers to receive regular monthly pension. For non-government employees, the withdrawal limit is higher—up to 80% can be withdrawn as a lump sum, with only 20% required for annuity purchase.

If the accumulated corpus is less than Rs. 8 lakh, government employees can withdraw 100% without the mandatory annuity purchase requirement. For non-government subscribers, if the corpus is between Rs. 8 lakh and Rs. 12 lakh, they can withdraw up to Rs. 6 lakh or up to 80% as lump sum, with the balance or at least 20% going toward annuity. For corpus amounts exceeding Rs. 12 lakh, the standard withdrawal rules apply.

Subscribers are not required to exit NPS at age 60. They have the option to defer receiving the lump sum amount until the age of 75 years, or withdraw it in installments until age 75. They can also defer the annuity purchase until age 75. At the age of 75 years, the account must be closed mandatorily. If a subscriber does not exit from NPS at 60 years of age, the account will automatically continue up to 75 years of age, and the subscriber can exercise the option of normal exit at any point they wish after 60 years. NPS also introduced a Systematic Lumpsum Withdrawal feature, allowing subscribers to remain invested with 60% of the corpus in NPS while the corpus continues to grow, with withdrawals made systematically at regular intervals (monthly, quarterly, half-yearly, or yearly).

NPS contributions are invested across four asset classes according to investment guidelines prescribed by PFRDA. Asset Class E includes equity shares of companies traded in the Futures and Options segment with a maximum allocation of 75% for private sector subscribers and 50% for government employees and senior citizens. Asset Class C consists of corporate bonds and debentures that are listed and rated not below 'A', with no upper limit on allocation. Asset Class G comprises government securities and State Development Loans, also with no upper limit. Asset Class A includes alternative investment funds such as CMBS, MBS, REITs, AIFs, and InvITs, with a maximum allocation of 5% and available only for NPS Tier-I accounts with active choice.

Subscribers can choose between two investment approaches: Active Choice and Auto Choice. Under Active Choice, subscribers plan and decide how their contributions are invested by selecting the Pension Fund Manager, the asset class schemes, and the percentage allocation across the four asset classes. The total allocation across E, C, G, and A must equal 100%. For Tier-II accounts, subscribers can allocate up to 100% to equity, while for Tier-I accounts, the equity allocation is capped at 75%.

Auto Choice offers an easier option through life-cycle funds where the proportion of funds invested across three asset classes (E, C, G) is determined by a pre-defined portfolio that changes automatically based on the subscriber's age. As age increases, exposure to equity and corporate debt decreases under Auto Choice. There are four different options within Auto Choice based on risk appetite: LC-75 (Aggressive Life Cycle Fund) with maximum 15% equity at age 55, LC-50 (Moderate Life Cycle Fund) with maximum 10% equity at age 55, LC-25 (Low Life Cycle Fund) with maximum 5% equity at age 55, and LC-Aggressive (Balanced Life Cycle Fund) with maximum 35% equity at age 55. This rebalancing of the portfolio takes place automatically on the subscriber's birthday.

Initially, government employees had no choice in fund manager or investment allocation, as both were decided by the government. Under the default Standard scheme, NPS contributions of government employees were distributed evenly across three public sector fund managers: SBI Pension Funds, LIC Pension Fund, and UTI Pension Fund. Now, government employees can choose from additional options including LC-50, LC-25, and Scheme G.

NPS is recognized as one of the lowest-cost pension schemes globally, with minimal charges that help maximize the retirement corpus. The charges are divided among various intermediaries in the NPS ecosystem. For account opening, the Central Recordkeeping Agency (CRA) charges Rs. 400 for Tier-I account opening with a physical PRAN Card and Welcome Kit, or a reduced fee of Rs. 200 if the subscriber opts not to have a physical PRAN Card or Welcome Kit. Opening a Tier-II account costs Rs. 200. Point of Presence (PoP) charges Rs. 120 for Tier-I account opening and Rs. 40 for Tier-II.

For ongoing account maintenance, CRA charges Rs. 112 per annum, while PoP charges Rs. 22 per transaction for contributions. The Pension Fund Manager (PFM) charges are based on the Assets Under Management (AUM), with 0.0102% for government sector subscribers and 0.0929% for all other subscribers. The Trustee Bank levy is 0.0032% of AUM, and the Custodian charges 0.0034% of AUM for government sector and 0.0049% for other subscribers. NPS Trust charges 0.005% of AUM. These ongoing charges are deducted from the subscriber's account periodically.

Transaction charges apply when making contributions or processing withdrawals. Tier-II transaction charges are the same as Tier-I. While these charges may seem numerous, the total cost remains significantly lower compared to other retirement savings products. The unbundled architecture of NPS, where each intermediary performs specialized functions, ensures economies of scale and keeps operational costs at a bare minimum, allowing more of the subscriber's money to be invested and grow over time.

There are currently 13 Pension Fund Managers registered with PFRDA to manage NPS investments. These include SBI Pension Funds (the largest and oldest, operating since April 2008), HDFC Pension Fund, ICICI Prudential Pension Fund, LIC Pension Fund, UTI Retirement Solutions Fund, Kotak Mahindra Pension Fund, Aditya Birla Sunlife Pension Fund, Axis Pension Fund Management Limited, Tata Pension Management Limited, DSP Pension Fund Managers Private Limited, and others. SBI Pension Funds manages all schemes under NPS and also Atal Pension Yojana (APY).

Each Pension Fund Manager has different schemes based on asset allocation and performance track records. Subscribers can choose any PFM based on their risk appetite, investment goals, and the historical performance of the fund manager across different asset classes. The performance of each PFM for each asset class is published weekly by NPS Trust and is available on their website. The portfolio of asset classes managed by each PFM is also periodically published on their respective websites.

Subscribers have the flexibility to change their PFM once in a financial year if they are not satisfied with the performance. This change can be requested online by logging into the NPS account or offline by submitting a physical application to the Point of Presence (PoP). Subscribers can also select different Pension Fund Managers for their Tier-I and Tier-II accounts independently, allowing for customized portfolio management across both account types.

PRAN stands for Permanent Retirement Account Number, a unique 12-digit identification number allotted to each NPS subscriber for their Individual Pension Account. The PRAN remains unchanged throughout the subscriber's lifetime, even when they shift employment, sector, or location. This portability is one of the key features of NPS, making it a truly portable pension scheme.

Subscribers receive their PRAN along with account access credentials in the Account Opening Kit, which is sent to their correspondence address within approximately two weeks from the date of account opening. The kit contains the PRAN Card (if opted for) and passwords for accessing the account online and via telephone (T-Pin).

There are multiple ways to access an NPS account. Subscribers can visit their registered Point of Presence (PoP) in physical mode. For online access, subscribers can use web-based login portals provided by the Central Recordkeeping Agencies (currently NSDL, KFintech, or CAMS) using the login credentials provided in the Account Opening Kit. Mobile applications are also available for convenient access to NPS accounts on smartphones. Additionally, subscribers can access their account information via telephone using the T-Pin received in the Account Opening Kit by calling the toll-free numbers: NSDL 1800 222 080 or KFintech 1800 208 1516.

Through these access points, subscribers can view their NPS holdings, check contribution status, track transactions, download statements, make additional contributions, update personal details, change investment choices, and initiate withdrawal requests. The CRA sends periodic Statement of Transactions (SoT) via email to the registered email address and a physical copy once a year to the correspondence address on record.

An annuity is a financial product that provides regular income payments to the subscriber after retirement in exchange for a lump sum investment. In NPS, upon reaching the superannuation age or exiting the scheme, subscribers are required to invest a portion of their accumulated pension corpus (minimum 40% for government employees and 20% for non-government employees) to purchase an annuity plan from one of the PFRDA-empanelled Annuity Service Providers (ASPs).

Currently, there are 14 life insurance companies empanelled by PFRDA as ASPs. These include SBI Life Insurance Co. Ltd, Life Insurance Corporation of India, Star Union Dai-ichi Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd, HDFC Life Insurance Co. Ltd, IndiaFirst Life Insurance Co. Ltd, Edelweiss Tokio Life Insurance Co. Ltd, Bajaj Allianz Life Insurance Co. Ltd, Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd, Kotak Mahindra Life Insurance Co. Ltd, Tata AIA Life Insurance Company Limited, Max Life Insurance Company Limited, PNB Metlife India Insurance Company Limited, and Aditya Birla SunLife Insurance Company Limited.

NPS subscribers can choose from various annuity plan options based on their pension requirements. The broad variants include: pension payable for life at a uniform rate to the annuitant only; pension payable for 5, 10, 15, or 20 years certain and thereafter till the annuitant is alive; pension payable for life increasing at a simple rate of 3% per annum; pension for life with a provision of 50% or 100% of the annuity payable to spouse upon death of the annuitant; pension for life with return of purchase price on death of the annuitant; and pension for life with provision of 100% of annuity payable to spouse upon death of annuitant and return of purchase price on death of the spouse.

The pension amount varies based on the annuity plan chosen, the ASP selected, the amount invested in the annuity, and the prevailing annuity rates at the time of purchase. For a comparative analysis of annuity plans and ASPs, subscribers can visit the CRA-NSDL annuity quote comparison portal. While the lump sum withdrawal from NPS and the amount used to purchase annuity are tax-exempt, the subsequent pension income received from the annuity is taxable as ordinary income at the subscriber's applicable tax slab rates. An advantage of purchasing annuity through NPS is that no Goods and Service Tax (currently 1.8%) is levied on the annuity plan.

The Unified Pension Scheme (UPS) was launched in 2024 as an option under the National Pension Scheme framework, specifically for Central Government employees already covered under NPS, including retirees who can also opt for UPS. While NPS is a defined-contribution scheme available to all Indian citizens with no guaranteed minimum pension amount and returns based on market performance, UPS guarantees a minimum monthly pension of Rs. 10,000 on retirement, calculated as 50% of the average basic pay over the last 12 months for employees with 25 or more years of service.

The contribution structure differs between the two schemes. In NPS, the employee contributes 10% of basic salary plus Dearness Allowance (DA), while the employer contributes 14% of basic salary plus DA. Under UPS, the employee contribution remains the same at 10% of basic salary plus DA, but the employer contribution is reduced to 18.5% of basic salary plus DA (increased from the initial 14% to account for the guaranteed pension component).

Both schemes offer similar tax benefits, with deductions available under Sections 80C, 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act. The fundamental difference lies in the pension calculation method—NPS relies entirely on market-linked returns without any guaranteed amount, while UPS provides a defined-benefit component with a guaranteed minimum pension, offering more certainty for government employees. UPS represents a middle ground between the old defined-benefit pension system and the purely market-linked NPS, combining elements of both to provide assured income security while maintaining some features of the contributory pension model.

NPS is often compared to 4 related retirement savings instruments:

NPS vs. Employee Provident Fund (EPF)

EPF is a mandatory retirement savings scheme for salaried employees in India, where both employer and employee contribute fixed percentages (12% each of basic salary plus DA). EPF offers government-declared interest rates (currently around 8.15-8.25% annually) that are relatively stable and not market-linked. The entire EPF corpus is tax-free on withdrawal after 5 years of continuous service (EEE status). In contrast, NPS is voluntary, offers market-linked returns that can be higher or lower than EPF depending on asset allocation and market performance, and requires mandatory annuity purchase for a portion of the corpus at retirement. NPS provides higher equity exposure options (up to 75%) compared to EPF's conservative debt-oriented investment approach, potentially offering higher long-term returns but with correspondingly higher risk.

NPS vs. Public Provident Fund (PPF)

PPF is a government-backed savings scheme with a 15-year maturity period, offering sovereign-guaranteed fixed returns (currently around 7.1% annually) and complete tax exemption on contributions, returns, and withdrawals (EEE status). PPF allows partial withdrawals after the 6th year and loan facilities, providing more liquidity than NPS. NPS, however, offers potentially higher returns through equity exposure and professional fund management, along with additional tax deduction of Rs. 50,000 under Section 80CCD(1B) exclusive to NPS. While PPF provides certainty of returns and complete tax exemption, NPS offers the possibility of higher wealth accumulation through market participation, though with the requirement of annuity purchase at maturity and taxation on annuity income.

NPS vs. Atal Pension Yojana (APY)

APY is a government-sponsored pension scheme focused on the unorganized sector, guaranteeing fixed minimum monthly pensions ranging from Rs. 1,000 to Rs. 5,000 based on contribution amounts and age of joining. The pension amount in APY is predetermined and government-guaranteed, while NPS pension depends on the accumulated corpus, investment performance, and prevailing annuity rates at the time of retirement. APY is designed for individuals without coverage under any statutory social security scheme, typically in the unorganized sector, whereas NPS caters to a broader audience including salaried employees, self-employed professionals, and anyone seeking market-linked retirement savings. APY contributions are fixed based on the desired pension amount, while NPS allows flexible contributions and investment choices.

NPS vs. Equity-Linked Savings Scheme (ELSS)

ELSS mutual funds are equity-oriented tax-saving investments with a 3-year lock-in period, after which the entire corpus can be withdrawn without any restrictions. ELSS offers tax deduction under Section 80C up to Rs. 1.5 lakh but does not provide the additional Rs. 50,000 deduction available under NPS Section 80CCD(1B). The entire withdrawal from ELSS is subject to capital gains tax (10% on gains above Rs. 1 lakh annually for long-term capital gains), while NPS allows tax-free withdrawal of up to 60% of the corpus with only the annuity income being taxable. ELSS provides complete liquidity after 3 years and is purely equity-oriented (minimum 80% equity exposure), while NPS requires lock-in until age 60 with mandatory annuity purchase but offers diversification across multiple asset classes. ELSS is better suited for investors seeking tax-saving equity investments with shorter commitment periods, while NPS is designed specifically for long-term retirement planning with disciplined savings.