National Pension Scheme (NPS): What It Is, Benefits, Tax Savings & How to Invest
Introduction
Retirement planning is one of the most important parts of personal finance. The National Pension Scheme (NPS) is a powerful option designed to help you build a secure retirement corpus while enjoying tax benefits.
But what is NPS exactly? How does it work, and can it really help you receive ₹50,000 monthly pension after retirement? Let’s explore everything you need to know.
💡 What is National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a voluntary, government-backed retirement savings scheme launched in 2004. Initially meant for government employees, it is now open to all Indian citizens (including NRIs) aged 18–70.
With NPS, you invest regularly during your working years, and at retirement, you receive a combination of lump sum and monthly pension.
🎯 Key Benefits of NPS
✅ Market-linked returns: Higher potential returns than traditional schemes like PPF and FDs.
✅ Tax benefits: Up to ₹2 lakh deductions — ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B).
✅ Low-cost structure: One of the lowest fund management charges (around 0.01%–0.09%).
✅ Flexible investment options: Choose asset allocation between equity, corporate bonds, and government securities.
✅ Portability: You can operate your NPS account across different jobs and locations in India.
💸 NPS Withdrawal Rules
While NPS is designed for retirement, it offers certain withdrawal flexibility:
🔓 Partial Withdrawals
- Allowed after 3 years from account opening.
- You can withdraw up to 25% of your own contributions (excluding employer contributions).
- Permitted for reasons like higher education, marriage, buying a house, or treating critical illness.
🏦 Full Withdrawal at Maturity
- At age 60, you can withdraw up to 60% of your total corpus as a lump sum (tax-free).
- The remaining 40% must be used to buy an annuity, which provides monthly pension and is taxable as per your slab.
🚪 Premature Exit
- Allowed after 10 years.
- You must use at least 80% of corpus to buy an annuity.
- Only 20% can be withdrawn as a lump sum.
💰 How Much Pension Can You Get From NPS?
Many investors ask: How can I get ₹50,000 pension per month in NPS?
It depends on:
- Total corpus accumulated
- Percentage annuitized (minimum 40% is mandatory)
- Retirement age
- Chosen annuity option and provider
💡 Example:
If you build a corpus of ₹1.5 crore and annuitize ₹60 lakh (40%), you may receive ₹35,000–₹55,000 monthly pension (depending on annuity rates).
📊 NPS Tax Benefits
| Section | Benefit Description |
|---|---|
| 80C | Deduction up to ₹1.5 lakh |
| 80CCD(1B) | Additional ₹50,000 deduction |
| 80CCD(2) | Employer contribution (up to 10% of salary) deductible |
At maturity, 60% withdrawal is tax-free, while the annuity income is taxable.
🛡️ Is NPS Safe to Invest?
Yes, NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). While it involves market-linked risks (mainly due to equity exposure), you can choose conservative options to reduce risk.
⚖️ Advantages of NPS
✅ Attractive tax benefits and additional deduction under Section 80CCD(1B).
✅ Potentially higher long-term returns due to market-linked investment.
✅ Low fund management fees.
✅ Flexibility to choose fund manager and asset allocation.
✅ Portable across jobs and states.
✅ Regulated and monitored by PFRDA.
⚠️ Disadvantages of NPS
⚠️ Long lock-in period till 60 years reduces liquidity.
⚠️ Mandatory annuitization of at least 40% at retirement.
⚠️ Annuity income is taxable.
⚠️ No guaranteed returns (returns depend on market performance).
⚠️ Limited partial withdrawal options.
📝 How to Open an NPS Account
1️⃣ Visit eNPS website or a Point of Presence (PoP) such as a bank.
2️⃣ Complete KYC using Aadhaar and PAN.
3️⃣ Choose account type — Tier I (for tax benefits) or Tier II (optional).
4️⃣ Select fund manager and asset allocation strategy.
5️⃣ Make your initial contribution (minimum ₹500 for Tier I).
💡 NPS Tier I vs Tier II
| Feature | Tier I | Tier II |
|---|---|---|
| Tax benefits | Yes | No |
| Withdrawals | Restricted until 60 yrs | Anytime |
| Minimum contribution | ₹500 | ₹1,000 |
🤔 NPS vs PPF vs FD
| Feature | NPS | PPF | FD |
|---|---|---|---|
| Returns | 8–10% (market-linked) | 7.1% (fixed) | ~6–7% (fixed) |
| Tax benefits | Up to ₹2 lakh | Up to ₹1.5 lakh | Up to ₹1.5 lakh (5-year tax-saving FD) |
| Liquidity | Low | Medium | Medium |
| Lock-in | Till 60 yrs | 15 yrs | 5 yrs |
| Risk | Moderate | Very Low | Low |
🔍 FAQs
What is NPS and its benefits?
NPS is a government-backed pension scheme offering tax benefits, market-linked returns, and a disciplined way to build a retirement corpus.
How can I get ₹50,000 pension per month in NPS?
Can I withdraw 100% from NPS?
No. You can withdraw up to 60% as a lump sum tax-free; 40% must be used to buy an annuity.
Is NPS better than PPF?
NPS offers higher potential returns but involves market risk. PPF is safer with fixed interest.
Is NPS better than FD?
Is NPS tax-free on maturity?
60% of the corpus is tax-free on maturity. Annuity income (40%) is taxable.
Which bank is best for NPS?
Most major banks like SBI, HDFC, and ICICI offer NPS with similar features. Choose based on service quality.
Is NPS safe to invest?
Yes, it is regulated by PFRDA, but equity exposure carries market risk.
How is NPS calculated from salary?
Employee contribution can be a fixed amount or a percentage of salary; employer contributions up to 10% are also deductible.
What is the disadvantage of NPS?
What is the lock-in period for NPS?
Lock-in till age 60. Partial withdrawals allowed after 3 years.
Does NPS give lifetime pension?
Yes, through the annuity purchased using at least 40% of the corpus at retirement.
What is the NPS interest rate?
No fixed rate; returns depend on market performance and asset allocation (historically 8–10%).
Can I exit from NPS after 5 years?
Partial exit allowed after 3 years for specific reasons; full exit before 60 requires 80% annuitization.
Is NPS risk free?
No, as it has market-linked investments. However, you can choose conservative asset allocations.
💬 Conclusion
The National Pension Scheme (NPS) is an excellent choice for long-term retirement planning if you want to combine market-linked growth with tax savings. However, understand its lock-in, withdrawal rules, and mandatory annuity requirement before investing. 👉 Open your NPS account today and secure your golden years!