What is NPS?
National Pension System (NPS) is a government-sponsored pension scheme that provides retirement income. It's regulated by PFRDA (Pension Fund Regulatory and Development Authority).
Types of NPS Accounts
Tier 1 Account (Primary)
- Mandatory for pension benefits
- Restricted withdrawal until 60
- Tax benefits available
- Minimum contribution: Rs 500/year
- Voluntary savings account
- No withdrawal restrictions
- No tax benefits (except Govt employees)
- Minimum contribution: Rs 250
- Limit: 10% of salary (Basic + DA) for employees; 20% of gross income for self-employed
- Combined with 80C: Total limit Rs 1,50,000
- Applicable: Tier 1 contributions only
- Limit: Rs 50,000 additional
- Over and above 80C limit
- Exclusive to NPS: Not available for other investments
- Maximum Tax Saving: Rs 15,600 (at 30% slab + cess)
- Limit: 10% of salary (Basic + DA) for private; 14% for Government
- Not part of 80C limit: Additional benefit
- Condition: Contribution by employer
- No cap: As much as employer contributes (within %)
- You decide allocation
- Maximum 75% in equity (reducing by 2.5% p.a. after 50 years)
- Flexibility to change Auto Choice (Lifecycle Fund)
- Age-based automatic allocation
- Three variants: Aggressive, Moderate, Conservative
- Equity reduces as you age
- Lump sum: Rs 60 lakh (tax-free)
- Annuity: Rs 40 lakh (monthly pension, taxable)
- Children's education/marriage
- Medical treatment
- Home purchase/construction
- Skill development Limit: 25% of own contributions (max 3 times) Tax: Tax-free
- Visit enps.nsdl.com
- Complete KYC with Aadhaar OTP
- Choose pension fund and investment option
- Make initial contribution
- Get PRAN (Permanent Retirement Account Number)
- Visit any Point of Presence (PoP)
- Submit registration form with KYC documents
- Make initial contribution
- Receive PRAN card
- Tax deduction for employer contribution
- Business expense under Section 36(1)(iv)(a)
- CSR compliance benefits
- Additional tax saving via 80CCD(2)
- Employer match (if applicable)
- Portable across jobs
Tier 2 Account (Optional)
NPS Tax Benefits
Section 80CCD(1): Basic Contribution
Section 80CCD(1B): Additional Deduction
Section 80CCD(2): Employer Contribution
Total NPS Tax Benefit
For Salaried Employee (Rs 12 lakh p.a.)
| Section | Contribution | Tax Saved (30%) | ||
|---|---|---|---|---|
| 80CCD(1) | Rs 1,20,000* | Rs 37,440 | ||
| 80CCD(1B) | Rs 50,000 | Rs 15,600 | ||
| 80CCD(2) | Rs 1,20,000 | Rs 37,440 | ||
| Total | Rs 2,90,000 | Rs 90,480 | ||
| Section | Contribution | Tax Saved (30%) | ||
| 80CCD(1) | Rs 1,50,000* | Rs 46,800 | ||
| 80CCD(1B) | Rs 50,000 | Rs 15,600 | ||
| Total | Rs 2,00,000 | Rs 62,400 | ||
| Class | Description | Risk | ||
| E (Equity) | Stock market investments | High | ||
| C (Corporate Bonds) | Corporate debt | Medium | ||
| G (Government Securities) | Govt bonds | Low | ||
| A (Alternate Assets) | REITs, InvITs | Medium-High | ||
| Age | Equity | Corporate | Govt | Alternate |
| 25 | 50% | 30% | 20% | 0% |
| 35 | 50% | 30% | 20% | 0% |
| 45 | 40% | 25% | 30% | 5% |
| 55 | 20% | 15% | 55% | 10% |
| Scheme | Equity | Corporate | Govt | |
| SBI | 11.5% | 8.9% | 8.4% | |
| LIC | 10.8% | 8.7% | 8.2% | |
| HDFC | 11.2% | 9.1% | 8.5% | |
| UTI | 11.0% | 8.8% | 8.3% | |
| Component | Percentage | Tax Treatment | ||
| Lump sum withdrawal | Up to 60% | Tax-free | ||
| Annuity purchase | Minimum 40% | Pension taxable | ||
| Component | Percentage | Tax Treatment | ||
| Lump sum | Only 20% | Tax-free | ||
| Annuity | Minimum 80% | Pension taxable | ||
| Type | Description | |||
| Life Annuity | Pension for life | |||
| Life with Return of Purchase | Pension + corpus to nominee | |||
| Joint Life | Pension for self and spouse | |||
| Life with Guarantee | Guaranteed pension period | |||
| Age at Retirement | Annual Annuity Rate | |||
| 60 years | 5.5-6.5% | |||
| 65 years | 6.0-7.0% | |||
| 70 years | 6.5-7.5% | |||
| Feature | NPS | PPF | EPF | MF |
| Lock-in | Till 60 | 15 years | Till retirement | None |
| Returns | 8-10%* | 7.1% | 8.15% | Variable |
| Tax on maturity | 60% free | 100% free | 100% free | LTCG 10%+ |
| Additional 80CCD(1B) | Yes | No | No | No |
| Flexibility | Medium | Low | Low | High |
How to Open NPS Account
Online (eNPS)
Offline
NPS for Corporate Employees
Company Benefits
Employee Benefits
Conclusion
NPS offers unique tax benefits, especially the additional Rs 50,000 deduction under 80CCD(1B). For long-term retirement planning, combining NPS with other instruments like PPF and EPF provides comprehensive coverage.
Use our NPS Calculator to estimate your retirement corpus.
Written by
CA Work Desk
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