National Pension Scheme (NPS): Benefits, Eligibility, Tax Benefits and How It Works

Retirement planning in India has traditionally relied on pensions, savings and family support, but the financial landscape has evolved. To help citizens build a secure and independent future, the Government of India introduced the NPS scheme. It encourages long-term, disciplined investing while offering transparency, flexibility and affordability.

Let us explore the NPS scheme details!

What Is the National Pension Scheme (NPS)?

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013. PFRDA oversees the fund managers, sets investment norms, and ensures transparency for subscribers.

It is a long-term retirement savings scheme introduced by the Central Government to provide individuals with a steady income after retirement. It helps people build a pension corpus through disciplined and systematic investing during their working years.

What are the Features of NPS?

NPS features include being regulated and low-cost, with a flexible and portable account that offers market-linked returns.

• Market-linked returns, with no fixed or guaranteed interest rate
• It is flexible. Choose your own Pension Fund Manager, investment scheme, and contribution amount
• Fully portable across jobs, cities, employers, and the public and private sectors
• Professionally managed by PFRDA-regulated Pension Fund Managers
• Tax benefits available under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act
• Manageable entirely online, from account opening to changing your investment choices

How NPS Works in India?

Here is the process of how NPS works: 

1. Open an NPS account online through the eNPS portal, or offline through an authorised Point of Presence (PoP), such as a participating bank
2. Contribute regularly during your working years; Central and State Government employees, as well as employees at corporates that have adopted NPS, may also receive employer contributions
3. Choose your Pension Fund Manager and investment option, either Active Choice or Auto Choice, allocating across Asset Classes E (equity), C (corporate debt), and G (government securities)
4. Your corpus grows over time based on market performance and your chosen asset allocation
5. At exit, part of the corpus is withdrawn as a lump sum, and the remainder is used to purchase an annuity that provides a regular pension, as per PFRDA’s exit and withdrawal rules

What are the Types of NPS Accounts?

NPS scheme details include two account structures:

Tier I is the default, mandatory pension account, and every NPS subscriber must open one first. Tier II is a voluntary add-on that requires an active Tier I account; it functions more like a flexible savings account than a pension account, since withdrawals are unrestricted.

Feature	Tier I Account	Tier II Account
Purpose	Primary individual pension account	Optional flexible savings account
Withdrawal Rules	Restricted, governed by NPS exit and withdrawal regulations	Unrestricted; withdraw anytime
Minimum to Open	₹500	₹1,000
Yearly Minimum Contribution	₹1,000	No minimum requirement
Tax Benefits	Eligible under Section 80C and 80CCD	Not eligible for most subscribers (exception: the Tier II Tax Saver Scheme, available only to eligible Central Government employees, with a 3-year lock-in)

Asset Classes in NPS

Under the All Citizen Model, the common asset classes are 

• Asset Class E (equity and equity-related instruments)
• Asset Class C (corporate debt instruments)
• Asset Class G (government bonds and related securities)
• Asset Class A (Alternative Investment Funds such as REITs and AIFs

Note: Asset Class A is available only in select NPS frameworks and is capped at 5% where offered, so most individual subscribers under the All Citizen Model invest across E, C, and G only.

Important allocation rules:

• The contribution to Asset Class A cannot exceed 5%.
• The combined allocation across E, C, G and A must be exactly 100%.
• In Tier II accounts, you can allocate 100% to equity.
• In Tier I accounts, you can allocate up to 75% to equity.

What are the Investment Choices in NPS?

Subscribers decide how to invest their contributions through two methods.

Option	How It Works	Allocation Limits
Active Choice	You select the Pension Fund Manager, scheme, and percentage allocation yourself	Asset Class E up to 75%, C up to 100%, G up to 100%
Auto Choice	A life-cycle option that adjusts your allocation automatically as you age, shifting from equity toward safer debt instruments over time	Four life-cycle options: Life Cycle 25 (Low), Life Cycle 50 (Moderate), Life Cycle 75 (High), and Life Cycle Aggressive

Does NPS Offer a Fixed Interest Rate?

No, NPS does not offer a fixed or guaranteed interest rate. It’s a market-linked scheme, so your returns depend on the investment option you choose, your asset allocation across equity, corporate debt, and government securities, and overall market performance. This makes it fundamentally different from traditional government-backed savings products like the PPF, which offer a fixed, government-declared rate.

Who Can Invest in NPS? 

Criteria	Eligibility Status
Eligibility	Indian citizens, resident or non-resident, and Overseas Citizens of India
Age	18 to 85 years
KYC Compliance	Mandatory
Account Ownership	Individual account only
Number of Accounts	Only one NPS account permitted per person

Under PFRDA’s current All Citizen Model, any Indian citizen, resident or non-resident, or Overseas Citizen of India (OCI), aged between 18 and 85, can voluntarily open an NPS account, subject to KYC compliance. Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible to subscribe.

Beyond voluntary individual participation, NPS also covers:

• Central Government employees: Mandatorily covered if they joined service on or after 1 January 2004, except armed forces personnel; this has also been extended to employees of Central Autonomous Bodies
• State Governments and State Autonomous Bodies: May adopt NPS for their employees based on their own respective policies
• Corporate Sector: Companies can voluntarily adopt NPS for their workforce under the Corporate Sector Model, with eligibility set by the employer

What Are the Tax Benefits of NPS?

NPS offers tax benefits under three sections of the Income Tax Act, though which ones apply depends on whether you’re under the old or new tax regime.

• Section 80CCD(1): Deduction for your own contribution, up to 10% of salary (Basic plus DA) for employees or 20% of gross income for the self-employed, within the overall ₹1.5 lakh combined limit under Sections 80C, 80CCC, and 80CCD(1). Available only under the old tax regime.
• Section 80CCD(1B): An additional deduction of up to ₹50,000 for your own NPS contribution, over and above the ₹1.5 lakh limit above, taking your total possible deduction to ₹2 lakh. Also available only under the old tax regime.
• Section 80CCD(2): Deduction for your employer’s contribution to your NPS account. Available under both the old and new tax regimes, generally up to 14% of salary for government employees, and up to 10% of salary under the old regime or 14% under the new regime for private-sector employees.

At retirement, you can withdraw up to 60% of the accumulated corpus as a tax-free lump sum under Section 10(12A). The portion used to purchase an annuity isn’t taxed at the time of purchase, though the pension income received from it later is taxable.

Retirement planning is not only about building a corpus. Having adequate insurance coverage is equally important to protect your finances from unexpected expenses. Learn the underinsured meaning and why being underinsured can affect your financial security.

How to Open an NPS Account?

Here is the process to open an NPS account online and offline: 

Online

1. Visit the official eNPS portal or the portal of your chosen Central Recordkeeping Agency (CRA), such as Protean, KFintech, or CAMS
2. Complete registration using Aadhaar or PAN-based e-KYC
3. Select your account type, Tier I or both Tier I and Tier II, along with your investment preference
4. Upload the required KYC documents
5. Make your initial contribution
6. Receive your Permanent Retirement Account Number (PRAN) for future access

Offline

Visit a Point of Presence (PoP) appointed by PFRDA, such as a participating bank. Collect and submit the registration form (UOS-S1) at your nearest PoP Service Provider (PoP-SP), which you can locate through your CRA’s website.

Final Thoughts

NPS suits anyone who wants a disciplined, tax-efficient way to build a retirement corpus and is comfortable with returns that move with the market rather than a fixed, guaranteed rate. It’s less suited to those who need their savings fully liquid before retirement, given Tier I’s lock-in until age 60.

Looking for a pension plan with assured payouts? Read our detailed guide on the Pradhan Mantri Vaya Vandana Yojana to know eligibility, benefits and returns.

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Disclaimer- The rankings and figures in this article have been compiled from multiple verified reports, credible news sources, and public financial data available as of 2026.
All values are approximate and may vary with newer updates, revisions, or changes in official records.

National Pension Scheme (NPS) – FAQs

Sources: PFRDA and NPS Trust