What Is NPS: Meaning, Features and Benefits Explained

03^rd Nov 2025...

Published By : 811

Key Takeaways

The National Pension System (NPS) is a voluntary, government-backed retirement savings scheme regulated by PFRDA for individuals aged 18 to 70.
It offers two account types—Tier I for long-term retirement savings with withdrawal restrictions and tax benefits, and Tier II for flexible savings without tax deductions.
Investors can choose between Active Choice, where they decide the asset mix, or Auto Choice, which adjusts allocation based on age.
On retirement, up to 60% of the corpus can be withdrawn tax-free, while 40% must be used to buy an annuity for lifelong pension income.
Contributions qualify for deductions up to ₹2 lakh per year under Sections 80C, 80CCD(1), and 80CCD(1B), with additional employer contributions exempt under Section 80CCD(2).
Partial withdrawals up to 25% of personal contributions are allowed after three years for education, marriage, housing, or medical needs.
NPS combines market-linked returns, low costs, portability, and strong regulatory oversight, making it one of India’s most efficient retirement planning options.

Planning for retirement is one of the most important financial decisions in life. While income may stop after retirement, expenses rarely do. To ensure a steady flow of income in your later years, the government of India introduced the National Pension System (NPS), a structured savings scheme designed to help you build a long-term retirement corpus.

In this article, we explain what is NPS scheme and benefits, how it works, and why it continues to be one of the most preferred pension options for salaried professionals and self-employed individuals in India.

What Is NPS?

The National Pension System (NPS) is a voluntary, long-term retirement savings plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows individuals to invest regularly during their working years and receive a steady income after retirement through partial withdrawals and annuities.

Anyone between 18 and 70 years of age can open an NPS account, regardless of whether they are salaried, self-employed, or working in the private or public sector. The goal is simple to encourage disciplined savings habit and create a sustainable income source for entertainment.

Types of NPS Accounts

There are two main types of NPS accounts, each serving a different purpose:

Tier I Account
This is the primary NPS account and is meant exclusively for retirement savings. Withdrawals are restricted until you reach the age of 60. Contributions to this account are eligible for tax benefits under Sections 80C and 80CCD of the Income Tax Act.
Tier II Account
This account offers more flexibility. You can withdraw money anytime, but contributions to Tier II are not eligible for tax deductions. It acts as a voluntary savings account linked to your main NPS Tier I account.

By maintaining both accounts, you can balance long-term retirement savings with short-term liquidity needs.

Features of NPS

NPS comes with several unique features that make it suitable for long-term investors:

Flexible contribution options
You can decide how much to invest and how often. There is no fixed monthly deposit requirement, giving you the freedom to contribute based on your financial situation.
Professional fund management
NPS investments are managed by expert pension fund managers approved by PFRDA. You can even switch between fund managers if you are not satisfied with the performance.
Choice of investment mix
The scheme allows you to allocate funds across equity, corporate bonds, and government securities. You can either choose your own allocation (Active Choice) or allow automatic rebalancing based on your age (Auto Choice).
Portability
Your NPS account is not tied to your employer or location. You can continue contributing even if you change jobs or move to a different city.
Transparent structure
Investors can view contributions, returns, and fund performance online through the CRA (Central Recordkeeping Agency) portal, ensuring full transparency.

How the NPS Works

When you invest in NPS, a part of your contributions grows over time through market-linked returns. On reaching 60 years of age, you can withdraw up to 60% of your accumulated corpus as a lump sum. The remaining 40% must be used to purchase an annuity, which provides a regular pension income for life.

This structure ensures that you enjoy both a retirement corpus and a continuous income stream after your working years.

Tax Benefits of NPS

NPS offers multiple layers of tax benefits, making it one of the most tax-efficient retirement products available.

Contributions up to ₹1.5 lakh in a financial year qualify for deduction under Section 80C and Section 80CCD(1).
An additional deduction of ₹50,000 is available under Section 80CCD(1B), taking the total possible deduction to ₹2 lakh per year.
Employer contributions up to 10% of basic salary and dearness allowance are also tax-free under Section 80CCD(2).
On maturity, 60% of the corpus withdrawn is tax-free, and the annuity purchased with the remaining 40% is taxable as per your applicable slab.

These tax incentives make NPS an attractive choice for anyone looking to reduce taxable income while building a long-term pension fund.

Also Read: A Guide for Gen Z to Secure their Financial Future with National Pension Schemes

NPS Benefits for Investors

Understanding the key NPS benefits helps highlight why the scheme continues to grow in popularity among Indian investors:

Government-backed safety
The NPS is regulated by PFRDA, ensuring strong oversight and security for investors.
Market-linked growth
Unlike traditional pension schemes with fixed returns, NPS offers higher growth potential through market-linked investments across equity and debt.
Low cost and high efficiency
NPS has one of the lowest fund management charges in the industry, allowing more of your money to stay invested and grow.
Lifelong income
By converting part of your corpus into an annuity, you secure a steady monthly income even after retirement.
Tax efficiency
The triple tax advantage under the old tax regime makes NPS one of the most tax-friendly investment options available today.

These national pension scheme benefits make it an excellent choice for anyone looking for a secure yet flexible way to save for the future.

Partial Withdrawal Rules

Although NPS is designed for long-term savings, limited withdrawals are allowed under certain conditions. After completing three years in the scheme, you can withdraw up to 25% of your own contributions (not including employer contributions) for specific purposes such as:

Higher education of children
Marriage of children
Purchase or construction of a house
Medical treatment for critical illnesses of self, spouse, or dependent family members

These withdrawals ensure that investors can access funds for genuine needs without disrupting their long-term retirement plan.

How to Open an NPS Account

You can open an NPS account through:

Any authorised bank or post office
Online portals such as the eNPS website
Digital banking apps that integrate NPS onboarding

The process is simple. You will need your PAN, Aadhaar, and basic KYC details. Once registered, you receive a Permanent Retirement Account Number (PRAN), which remains valid for life, regardless of job or location changes.

Choosing Between Active and Auto Choice

When opening your account, you can select how your money is invested:

Active Choice – You decide how to distribute your contributions among equity, corporate debt, and government securities.
Auto Choice – The fund automatically adjusts the asset allocation based on your age, reducing equity exposure as you get closer to retirement.

Both options are flexible, and you can switch between them if your investment goals or risk appetite change.

Conclusion

NPS is a balanced mix of safety, flexibility, and growth. It encourages consistent savings, provides professional fund management, and delivers lifelong income after retirement. With strong regulatory backing, low costs, and attractive benefits, NPS remains one of the most reliable retirement solutions available in India. Whether you are a salaried professional or self-employed, investing in NPS today can give you peace of mind tomorrow, ensuring your golden years remain financially secure.

Frequently Asked Questions

1. Can I have more than one NPS account?

No, you can have only one NPS account linked to your Permanent Retirement Account Number (PRAN), which remains valid throughout your lifetime.

2. Is NPS better than other pension schemes?

NPS offers greater flexibility, transparency, and market-linked growth compared to traditional pension schemes. Its low charges and tax benefits make it an efficient choice for long-term investors.

3. Can I withdraw my NPS before retirement?

Partial withdrawals of up to 25% of your own contributions are allowed after three years, but only for specific purposes like education, medical treatment, or home purchase.

4. What happens if I stop contributing to my NPS account?

If you stop contributing, your account will become inactive but can be reactivated anytime by paying the minimum contribution. Your existing balance will continue to earn returns.

5. Can I extend my NPS account after 60?

Yes, you can continue contributing to your NPS account until the age of 70. This allows your corpus to grow further before you start receiving pension payments.