National Pension Scheme (NPS): Details, Benefits, Eligibility (Guide)

Q: Is NPS withdrawal tax-free?

An NPS account holder can withdraw up to 60% of their balance tax-free upon maturity. The remaining 40% invested in an annuity is also tax-free. However, the annuity income is taxable according to the investor's income tax slab.

14 min read • Published 25 February 2023

Written by Animesh Gupta

What is National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a pension and investment plan launched by the Indian government in 2004. The Pension Fund Regulatory and Development Authority (PFRDA) governs this scheme.

The objective of this scheme is to provide social and financial security to senior citizens. NPS provides impressive long-term saving options, which enable you to plan your retirement more efficiently.

NPS covers public, private, and even unorganised sector employees, except for the armed forces. Any Indian citizen from the age group of 18 years to 60 years can open a National Pension Scheme account.

The primary goal of this scheme is to encourage citizens to invest in a pension account regularly during their professional careers. As a result, the contributors can withdraw a certain percentage of the fund upon retirement while receiving the remaining monthly pension.

In the NPS plan, you can make a minimum contribution of ₹6,000 in a financial year, equivalent to monthly instalments of ₹500. National Pension Schemes mature when the contributor reaches the age of 60, with an option to extend it to 70.

This scheme comes with tax benefits under section 80C and section 80CCD. Read on to learn more about NPS.

How to Open a National Pension Scheme Account?

You can open your NPS account online or offline:

Offline (Through POP-SP):

A POP (point of preference) centre can help you open an NPS account offline. A POP could be a bank branch, post office or any financial institution appointed by the Pension Fund Regulatory and Development Authority (PFRDA).
You will be required to submit your KYC documents, such as your Aadhaar card and PAN card, along with the signed application form.
Upon making your initial investment, the POP centre will send you a PRAN (permanent retirement account number).
During this registration process, there will be a one-time fee of ₹125.

Online (Through the eNPS Website):

It is easy and hassle-free to open an NPS account online. To open an NPS account online, ensure that your Aadhaar, PAN, and mobile number are interlinked. The following steps are:

Visit enps.nsdl.com
Register with an Aadhaar or PAN and click on the “generate OTP” option.
You will receive the OTP on your registered mobile number.
Enter OTP and enter your personal, bank, and nomination details.
After submitting your application successfully, your permanent retirement allotment number (PRAN) will be issued.
Submit your photograph and click on the e-signature option. You will receive an OTP on your mobile number.
Enter the OTP to verify your signature and then make the payment.

Types of National Pension Scheme Accounts

When it comes to types of NPS accounts, the National Pension Scheme offers two categories of accounts: tier-I and tier-II.

Tier-I National Pension Scheme Account:

NPS tier-I is a mandatory account. For enrollment in the NPS plan, you will need a tier-1 account.
It is not possible to withdraw funds from tier-I until you reach the age of 60. Withdrawals are conditional and limited.
Upon reaching 60 years of age, you can withdraw up to 60% of your corpus. The remaining 40% will be used to purchase annuities to provide you with a fixed monthly income.
You can start a tier-I account by making a minimum contribution of ₹500.
A tier-I NPS account is eligible for a tax exemption benefit of up to ₹2 lakh per annum under sections 80C and 80CCD.

Tier-II National Pension Scheme Account:

NPS tier-II is a voluntary account. Please note that you will need a tier-I account if you wish to enrol in the NPS tier-II account.
Tier II does not have any withdrawal limits or conditions. You can withdraw your funds whenever you wish.
You can start a tier-II account by making a minimum contribution of ₹1,000.
A tier-II NPS account offers tax exemptions worth ₹1.5 lakh, but these are available only to government employees. Private sector employees and self-employed individuals are not eligible for tax exemption under this scheme.

Models of NPS Accounts

There are three NPS models in India.

Government Model

The first one is for government employees excluding those in the Armed Forces, who were recruited on or after January 1, 2004. This model is also followed by all state governments except West Bengal. In this model government employees contribute 10% of their salary each month. The government matches this contribution with an amount. Starting from April 1 2019 the employers contribution rate for central government employees has been increased to 14%.

Corporate Model

The second model is for companies that can choose to adopt the NPS (National Pension System) for their employees based on their employment conditions.

All Citizens Model

Lastly there is an option for all citizens, between the ages of 18 and 65 to voluntarily join the NPS under the All Citizens Model.

Who Should Invest in the National Pension Scheme?

The National Pension System (NPS) is a retirement savings program, for individuals who wish to initiate early retirement planning and prefer low risk investments.
Both an Indian Resident and a Non-Resident of India (NRI) are eligible for NPS
Having a pension income during retirement can prove advantageous particularly for individuals retiring from private sector employment.
Making investments, in the NPS can significantly impact your retirement life. In fact those employed in positions seeking to optimise their 80C deductions can also explore the option of this scheme.

National Pension Scheme Features

The following features of the NPS scheme:

NPS offers tax exemption benefits of up to ₹2 lakh per annum (only in the tier-I category) under Sections 80C and 80CCD.
Subscribing to NPS is simple and easy. You can visit your nearest POPs to open an account. You can also open it online through the eNPS portal.
This government-backed scheme is regulated and administered by the pension fund regulatory and development authority (PFRDA) and is safe.
Any Indian citizen from the age group of 18 years to 60 years can open a National Pension Scheme account.
You can register your NPS account by making an initial investment of ₹500.
The minimum contribution for the financial year is ₹1,000. As a result, you can formulate investment decisions based on your choices and financial goals.
You can manage your account from anywhere in India.
After retirement, you can withdraw up to 60% of your corpus while receiving the remaining amount as a monthly pension.
NPS typically offers 9–12% of annual returns.
You can partially withdraw up to 25% of the contribution in three years from the account opening date. However, it only applies to specific circumstances, such as purchasing a home, funding children’s higher education, etc.

National Pension Scheme Benefits

Employees enrolled in the NPS are eligible for the following tax benefits for their self-contributions:

Under section 80 CCD (1), you can claim up to 10% of your salary for tax exemption. However, as per section 80C, the maximum tax exemption limit is ₹1.50 lakh.
NPS also offers additional tax benefits of ₹50,000 under section 80CCD (1B).

Employees enrolled in the NPS are eligible for the following tax benefits for their employer-contributions:

Employees have the opportunity to avail a tax deduction of 10% of their salary (which includes pay and dearness allowance) for the contributions made by their employer under Section 80 CCD(2). This deduction is in addition to the deduction of up to Rs.1.5 lakh allowed under Section 80CCE.
In case the employer contribution is made by the Central Government the deduction limit increases, to 14%.

Self-employed individuals are eligible for the following tax benefits:

Under section 80 CCD (1), you can claim up to 20% of your gross income for tax exemption. However, as per section 80C, the maximum tax exemption limit is ₹1.50 lakh.
Section 80CCD (1B) of the Income Tax Act also provides additional tax benefits of ₹50,000 for NPS contributions.

Tax exemption on partial withdrawals:

Individuals can withdraw up to 25% of their self contributions without having to pay any taxes. This flexibility allows them to use the funds for purposes like purchasing a house covering expenses for their children or meeting medical bills.

Tax exemption on annuity purchase:

Individuals can also enjoy tax benefits on annuity purchases made from their NPS account. They are eligible for a tax deduction under Section 80CCD(5) on the amount spent to acquire an annuity.

Tax exemption on lump sum withdrawal:

Upon reaching the age of 60 or superannuation subscribers can make lump sum withdrawals from their NPS account. The best part is that up to 60% of this lump sum amount is tax free as per Section 10(12A).

Corporate tax benefits:

Employers also have corporate tax advantages when contributing to their employees NPS accounts. They can claim a tax deduction, under Section 36(1)(iv)(a).

National Pension Scheme Interest Rate

The NPS is a market-linked product, meaning its interest rate correlates to the underlying market securities.

It allows you to choose a mix of investment options. You can select from a range of four asset classes: Corporate bonds, government bonds, equity and alternative assets.

As NPS offers two types of accounts, tier-I and tier-II, their returns may vary based on the asset classes.

The following table shows the interest rate range for different investment classes as of 19th August 2022:

National Pension Scheme Tier-I Returns

Asset Class	1 Year Returns	5 Years Returns	10 Years Returns
Class E	7.21–8.91%	11.98–13.28%	13.58–13.76%
Class C	2.99–4.01%	6.61–7.78%	8.89–9.37%
Class G	2.39–3.09%	6.60–7.63%	8.54–8.92%
Class A	6.55–11.34%	6.96%–10.51%	N/A

*Source: NPS Trust (As of 19th August 2022)

National Pension Scheme Tier-II Returns

Asset Class	1 Year Returns	5 Years Returns	10 Years Returns
Class E	6.55–9.63%	11.93–13.25%	13.47–13.82%
Class C	2.52–3.66%	6.92–7.69%	8.71–9.24%
Class G	2.47–3.11 %	6.61–6.98%	8.58–8.90%

*Source: NPS Trust (As of 19th August 2022)

NPS Tier 1 vs NPS Tier 2

NPS Tier 1	NPS Tier 2
The NPS subscription begins by opening a Tier 1 account, which comes with a PRAN (Permanent Retirement Account Number).	You are eligible to open the NPS Tier 2 account only if you already have a Tier 1 account.
In the NPS Tier 1 account your investment is locked until you reach the age of 60.	On the hand the Tier 2 account is optional. Allows for flexible withdrawals and exits.
With NPS Tier 1 you can make partial withdrawals in certain cases or make a premature exit till you turn 60.	Unlike the Tier 1 account there is no lock in period, for savings in the Tier 2 account. You have the freedom to withdraw from your Tier 2 account at any time.
You can claim tax deductions under specific sections of the Income Tax regulations for your investment in NPS Tier 1.	You cannot claim any tax deductions on contributions made to Tier 2 NPS account. When you exit the corpus will be subject to taxation.

Top 10 National Pension Schemes (NPS) in India

Scheme	NAV	5 years
LIC Pension Fund Scheme E – Tier II	28.35	12.30%
LIC Pension Fund Scheme E – Tier I	33.83	12.10%
ICICI Prudential Pension Fund Scheme E – Tier Ii	42.29	12.70%
ICICI Prudential Pension Fund Scheme E – Tier I	53.14	12.50%
UTI Retirement Solutions Scheme E – Tier II	42.4	12.00%
UTI Retirement Solutions Pension Fund Scheme E – Tier I	51.8	11.90%
Kotak Pension Fund Scheme E – Tier I	49.33	13.00%
Kotak Pension Fund Scheme E – Tier II	43.4	12.90%
HDFC Pension Management Company Limited Scheme E – Tier II	34.38	12.60%
SBI Pension Fund Scheme E – Tier II	40.73	11.90%

How NPS Returns are Calculated?

The interest rate for the NPS is not fixed making it challenging to determine the maturity amount and monthly pension. However you can make some educated estimates by taking into account factors like your contribution amount the investment options you select and the assumed rate of return.

The formula to calculate NPS returns is as follows:

The formula that the National Pension Scheme calculator India uses is:

A = P (1 + r/n) ^ nt

In the equation, the amount received at maturity is A. The other variables are the following.

P	Principal sum
R/r	Rate of interest per annum
N/n	Number of times interest compounds
T/t	Total tenure

Best NPS Schemes in India in 2023

Lic Pension Fund Scheme E – Tier II
Lic Pension Fund Scheme E – Tier I
Icici Prudential Pension Fund Scheme E – Tier II
Icici Prudential Pension Fund Scheme E – Tier I
Uti Retirement Solutions Scheme E – Tier II
Uti Retirement Solutions Pension Fund Scheme E – Tier I
Kotak Pension Fund Scheme E – Tier I
Hdfc Pension Management Company Limited Scheme E – Tier I
Hdfc Pension Management Company Limited Scheme E – Tier II
Kotak Pension Fund Scheme E – Tier II

What are the Entities Involved in the National Pension Scheme?

Pension Fund Regulatory and Development Authority (PFRDA)
NPS Trust
Pension Fund Managers (PFMs) – There are currently 6 PFMs in India
HDFC Pension Fund
ICICI Prudential Pension Fund
SBI Pension Fund
UTI Retirement Solutions
Axis Bank NPS
Kotak Mahindra Pension Funds
Point of Presence (PoP)

National Pension Scheme Withdrawal Process

NPS offers partial, post-retirement and voluntary withdrawal facilities to its subscribers:

Partial Withdrawal

You can partially withdraw from your NPS account in certain situations after meeting certain conditions. For instance, you may withdraw partially for medical emergencies, construction or purchase of a house, and children’s higher education or marriage.

Partial withdrawal is subject to the following rules:

It is necessary to hold your account for at least three years.
You can withdraw 25% of the total corpus.
You can withdraw only three times with a minimum five-year interval between each withdrawal.

Withdrawal After Retirement

Withdrawal after retirement is subject to the following rules:

If your total corpus is less than ₹ 5 lakh, it is possible to withdraw the entire amount.
In case your total corpus is more than ₹ 5 lakh. You can withdraw up to 60% of the funds. The remaining funds will be utilised to purchase an annuity plan.

Voluntary Exit

You can voluntarily exit the national pension scheme under the following rules:

The voluntary exit is only available if you have held your account for at least ten years.
It is possible for you to withdraw the entire amount if your corpus is less than ₹2.5 lakh.
If your total corpus is more than ₹2.5 lakh, you can withdraw up to 20% of your fund. The remaining funds will be utilised to purchase an annuity plan.

The NPS withdrawal is an easy process. You can visit your nearest POP centre with the required forms and documents to withdraw the funds. You can apply online as well at the NSDL portal.

Final Thoughts

National Pension Scheme (NPS) is a government-backed pension scheme that can help you plan your retirement more effectively. Subscribing to NPS is simple. You can start your account by visiting any nearest POPs or online.

NPS offers substantial tax benefits and typically yields 9–12 % annual returns, making it an attractive investment vehicle.

Frequently Asked Questions

Can I open more than one NPS account?

It is not possible to open multiple accounts. However, you can open a tier-II NPS account as well. In addition, you can open an Atal Pension Yojana account.

Can an NRI join NPS?

The national pension scheme is available to all Indians, including NRIs or overseas Indian citizens who wish to plan for retirement. Only employees of the Indian armed forces cannot join the NPS.

Can I withdraw 100% of the amount from NPS?

You can withdraw 100% of your corpus upon retirement if the total accumulated corpus is less than ₹5 lakh. If you opt for a voluntary exit, you can withdraw 100% of your total corpus if the accumulated corpus is less than ₹2.5 lakh.

What is the benefit of NPS in income tax?

Employees can claim up to 10% of their salary as tax exemption under section 80 CCD(1). Self-employed individuals can claim up to 20% of their gross income. However, as per section 80C, the maximum tax exemption limit is ₹1.50 lakh. NPS also offers additional tax benefits of ₹50,000 under section 80CCD(1B).

Is NPS withdrawal tax-free?

An NPS account holder can withdraw up to 60% of their balance tax-free upon maturity. The remaining 40% invested in an annuity is also tax-free. However, the annuity income is taxable according to the investor’s income tax slab.

What is the minimum amount for NPS?

You can open an NPS tier-I account by making a minimum contribution of ₹500. To open a Tier-II account, you can contribute a minimum of ₹1,000 at the time of registration.

What is the lock-in period for the National Pension Scheme (NPS)?

NPS has a 60 years lock-in period. However, you may partially withdraw or exit voluntarily if certain conditions are satisfied:
You can opt for the voluntary exit option if you’ve held the account for 10 years or more. If the balance is less than ₹2.5 lakh, you may withdraw 100% of the amount. If the balance is more than ₹2.5 lakh, you may withdraw up to 20%.

You can also partially withdraw from your NPS account after holding the account for at least three years or more. You can withdraw up to 25% for needs like medical emergencies, the purchase of a house, etc.