National Pension Scheme (NPS) Guide 2025: Benefits, Tax, Eligibility

An insightful guide for National Pension Scheme

We all are gonna get old one day, therefore we all plan our future life after retirement. Old age is inevitable, and we can't continue working till that age; our bodies will not be capable of doing things as we can now.

Financial security is very crucial for our old age. One of the methods for economic security is using the tool called the National Pension Scheme (NPS), which is specifically designed to help the upcoming generation of senior citizens in India.

Let's understand the concept behind the National Pension Scheme (NPS):

The National Pension Scheme is a self-voluntary, long-term savings and investment plan intended to provide a regular income after retirement.

This scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

A salaried person's sum of money from their income is set aside, on a separate account, which is then invested, grows over time, and eventually provides a lump sum and a monthly pension when he gets retire.

Can you join the National Pension Scheme?

Here are the basic eligibility criteria if you are thinking of being a part of NPS:

Citizenship: Any Indian citizen can be a part of this program, however, the person must be;
- Resident Indians.
- Non-Resident Indians (NRIs).
- Overseas Citizens of India (OCIs).
Age: any person who is in the above-mentioned category in the age between 18 years old till 70 years old.
Compliance for KYC: The process of fulfilling 'know your customer' KYC is simple; all we need to do is provide our identity and address proof to the authorised entities.

Ever wondered how the mechanism behind the National Pension Scheme works?

YOUR Contribution: A person who has subscribed to the National Pension Scheme will make regular payments to the separate account of the NPS.
- In case of a salaried person, the employer can contribute on behalf of the employee.
And, the employer can also provide additional benefits by contributing extra money to your contribution.
Permanent Retirement Account Number (PRAN): The Permanent Retirement Account Number (PRAN) is a unique 12-digit number for a person that stays with them, which acts as a unique ID for their pension.
Professional Fund Management: The money set aside by a person doesn't just sit idle; it is put to use in the form of investment.
- This gives a systematic return to the person in the form of interest or dividend, which later can be given back to the person in the form of investment.
- The money invested on behalf of the contributing individual is invested and managed by the authorised professional, making the process safe and secure.
Investment choices: The NPS provides the contributor with an option to select in what way his money is to be invested.
- Equity: the contributed money of the person can be invested in the equity market, however, it has a high risk, but at the same time higher potential of giving returns.
- Corporate Bonds: Investments in debt securities issued by companies. Generally considered less risky than equities.
- Alternative Investment Funds (AIF): The types of investments included in it are Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), etc.
  - These types of investments are for the people who probably have the knowledge in investing or have alternative goals.
Types of Investment Strategies Applied to the National Pension Scheme:
- Active Choice: If a person has certain knowledge about investment, they can choose in what pattern this contribution will be invested based on above mentioned investment sources.
- Auto Choice (Lifecycle Fund): In case a contributing person is not very knowledgeable in the field of investment, they choose the auto choice option, and the entire process will become automated based on this risk appetite or goals.
Accumulation Phase: The retirement corpus, the investments, and the interest on it build up with the compounding effect, and the returns will be visible in the long term.
Retirement/Maturity: The maturity phase of this plan comes after the person attains the age of 60 years, at which they can withdraw and enjoy all the benefits of their pension.

📌You can also read:

Tier I vs. Tier II Accounts: Understanding the Difference

Particulars	Tier I	Tier II
Purpose	It is a mandatory primary retirement account.	That is an optional savings account that can only be opened when a person has the Tier I account.
Lock-in Period	To ensure that the money is preserved, the withdrawal option comes at the age of 60 years.	No lock-in period, a person can withdraw money when needed.
Flexibilty	Low	High
Tax Benefits	Eligible for tax deductions.	Not eligible. (except for Central Government Employees)
Minimum Contribution	Currently ₹1000 per financial year, with a minimum of ₹500 per contribution.	Often ₹250 or ₹10,00 depending on the Point of Presence.

Key Benefits of investing in the National Pension Scheme:

Building a Retirement Corpus: The fundamental benefit of NPS is to ensure money is saved for the time when a person stops working/earning money as a backup support in the time of retirement.
Attractive Tax Benefits (Primarily for Tier I): As per the Income Tax Act, there are a few sections that mention the advantages of having an NPS account for the Tier I subscribers: a. Section 80CCD(1): You can claim a deduction for your contributions to NPS up to 10% of your salary (Basic + Dearness Allowance). For self-employed individuals, this limit is 20% of their gross total income. This deduction falls under the overall limit of ₹1.5 lakh per year available under Section 80C of the Income Tax Act. b. Section 80CCD(1B): This is an additional deduction exclusively for NPS contributions, up to ₹50,000 per year. This is over and above the ₹1.5 lakh limit of Section 80C. This means, effectively, you can claim deductions up to 2 lakh by investing in NPS. c. Section 80CCD(2) (for salaried individuals): If your employer contributes to your NPS account, that contribution (up to 10% of your salary; 14% for Central Government employees) is also eligible for a tax deduction. This deduction has its separate limit and doesn't fall under the ₹1.5 lakh or ₹50,000 individual caps, making it very beneficial.
Low Cost of Management: In comparison to other available investment options, the NPS has the lowest charges of tax and administrative fees.
Portability: The PRAN and NPS accounts are fully portable across different jobs, which means even if a person changes their job or their location (within India) can enjoy the same benefits of NPS.
Flexibility: A person can choose the ways this hard-earned money is invested across different channels.

How to Open a National Pension Scheme (NPS) Account:

Online	Offline
It can be applied eNPS portal (managed by Protean eGov Technologies Ltd	A person can also open an account by visiting a Point of Presence (POP) or a Point of Presence.
Or taking the help of the nearest Pragya-Kendra	When visiting the bank, a person has an account with it.

Options after Retirement:

Lump-Sum Withdrawal: A person gets the option to withdraw up to 60% of the total accumulated amount.
Annuity Purchase: An Annuity means a person will get a sum of money for the rest of their life in the form of a pension.
Continue or defer option: a. A person can choose to continue their contribution between the ages of 60 years to 75. b. Or, a person can choose not to withdraw their money and let it compound till their age of 75, and then withdraw it.

What About Early Withdrawals or Exiting Before Retirement?

Partial Withdrawal from Tier I: After being in the scheme for more than 3 years a person can withdraw some of their contribution upto 25%, by giving the following reason.
- Children's higher education or marriage.
- Purchase or construction of your first house.
- Treatment of specified critical illnesses for self, spouse, children, or dependent parents. By making a maximum of three such withdrawals during the entire tenure, with a minimum gap between them (this gap may be waived for medical emergencies).
Premature Exit (Before Age 60): Before a person turns the age of 60, the accumulated amount can be withdrawn up to 80% of the total, and the remaining 20% later as a lump sum.
- However, if the accumulated amount is less than or equal to 2.5 lacks, they can withdraw the whole amount.

What Happens if the Subscriber Passes Away?

If the NPS subscriber unfortunately passes away, the entire accumulated pension corpus in the NPS account is paid to the nominee or the legal heir. They have the option to either withdraw the entire amount or, if they wish, use some or all of it to purchase an annuity for themselves.

Conclusion:

Retirement planning is very important, and it can't be skipped. The National Pension Scheme provides a structured, flexible, and government-backed platform to help us build that essential retirement assurance.

With proper financial planning, we can enjoy our golden age peacefully without worrying about money for our daily needs.

We should start accumulating money in the government initiatives like the National Pension Scheme so that we don't regret it in the later stages of our lives.

📌You can also read:

National Pension Scheme (NPS) Guide 2025: Benefits, Tax, Eligibility

Let's understand the concept behind the National Pension Scheme (NPS):

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