Planning for retirement is not optional anymore. Rising life expectancy, higher medical costs, and limited pension coverage mean you need a structured way to build income for your later years. Relying only on savings or fixed deposits often falls short over the long term.
The National Pension Scheme (NPS) is a government-backed retirement savings plan created to address this gap. It lets individuals contribute regularly during their working years and receive a mix of lump-sum withdrawal and pension income after retirement.
This article explains what the national pension scheme is, how it works, its key advantages and limitations, and how it compares with other retirement options.
What is the National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a long-term retirement savings plan regulated by the Government of India. It helps individuals build a retirement corpus through regular contributions during their working years, with part of the accumulated amount paid out as a pension after retirement.
The primary objective of NPS is simple:
- Encourage disciplined retirement savings
- Provide a steady income after retirement
- Reduce dependence on a single pension or fixed-income source
NPS is open to employees from the private sector, public sector, and even the unorganised workforce, making it one of the most widely accessible retirement schemes in India.
Also Read: Post Office Monthly Income Scheme (POMIS)
History and evolution of NPS in India
NPS was introduced in 2004 only for central government employees, except the armed forces. Over time, its scope expanded:
- 2009: Opened to all Indian citizens on a voluntary basis
- Later years: Extended to NRIs
- Recent updates: Allowed continuation of accounts up to the age of 85, with revised withdrawal rules
Eligibility criteria for enrolling in NPS
You can open an NPS account if you meet the following conditions:
- You are an Indian citizen, resident, or non-resident
- You are between 18 and 70 years at the time of joining
- You meet the KYC requirements
- You are legally eligible to enter into a contract
PIOs, and HUFs are not allowed to open an NPS account.
How Does the National Pension Scheme Work?
NPS works on a contribution-based model, where your retirement corpus depends on how much you invest and how your investments perform over time.
Contribution structure
You contribute to your NPS account during your working years. Contributions can be made monthly, quarterly, or annually.
There is no fixed monthly amount; you can contribute as per your capacity. However, a minimum annual contribution is required for Tier I accounts to keep them active. This flexibility allows investors to increase or decrease contributions in response to income changes.
Also Read: Liberalised Remittance Scheme
Investment options and fund management
Your NPS contributions are invested across different asset classes:
- Equity (market-linked growth)
- Corporate debt
- Government securities
- Alternative assets (limited exposure)
You can choose between:
- Active choice, where you decide how your money is split across asset classes
- Auto choice, where asset allocation adjusts automatically based on your age
Professional pension fund managers handle these investments, and subscribers are allowed to switch fund managers if required.
Role of the Pension Fund Regulatory and Development Authority (PFRDA)
The entire NPS ecosystem is regulated by the Pension Fund Regulatory and Development Authority. PFRDA is responsible for regulating NPS operations, setting investment and withdrawal rules and monitoring pension fund managers.
This regulatory oversight brings transparency and standardisation to the national pension scheme, making it a structured option for retirement planning.
Pros of the National Pension Scheme
NPS is built for long-term retirement savings. Its structure focuses on tax efficiency, flexibility, and low costs, which makes it relevant for salaried and self-employed individuals planning for retirement over decades.
Tax Benefits
NPS offers clear tax advantages under the old tax regime.
- You can claim up to ₹1.5 lakh under Section 80C.
- An extra ₹50,000 is available under Section 80CCD(1B).
- Employer contributions qualify for deduction under Section 80CCD(2), subject to limits.
At retirement, 60% of the total corpus withdrawn as a lump sum is tax-free. The portion used to buy an annuity is exempt at purchase, but the pension received later is taxable.
Flexibility and Portability
NPS works across jobs and locations:
- One PRAN remains valid throughout your career
- Contributions can continue during job changes or breaks
- You can change asset allocation and fund managers
- Contributions can be made at any time of the year
This allows the account to continue without disruption.
Market-Linked Growth Potential
NPS invests across equity, corporate debt, and government securities.
- Equity helps with long-term growth
- Debt and government securities bring stability
- Allocation can be self-managed or age-based
Returns vary but long-term exposure across asset classes helps build a larger retirement corpus than fixed-return options.
Low-Cost Structure
NPS has one of the lowest cost structures among retirement products. Fund management charges are minimal and lower costs keep more money invested. This way, cost efficiency becomes meaningful over long investment periods
Cons of the National Pension Scheme
NPS prioritises retirement income, which means flexibility and certainty are limited. These constraints may not suit every investor.
Limited Liquidity
Access to funds is restricted in Tier I accounts: lock-in applies till retirement and partial withdrawals are allowed only after three years. Also, withdrawals are permitted for defined purposes only. This reduces short-term access to savings.
Compulsory Annuity Purchase
You need to set aside a portion of the corpus to buy an annuity at retirement. Recent regulations have reduced the mandatory annuity to 20% of the corpus (for corpus > ₹12 Lakh), allowing you to withdraw up to 80% as a tax-free lump sum. This can limit control over how retirement funds are used.
Market Risks
Returns depend on market performance:
- Equity exposure can cause fluctuations
- Corpus value may fall during weak market phases
- The timing of retirement can affect outcomes
Lack of Guaranteed Returns
NPS does not offer fixed or assured returns:
- No guaranteed interest rate
- Final returns depend on asset allocation and market performance
How to Enroll in the National Pension Scheme
Enrolling in NPS is straightforward and can be done either online or offline. The process mainly involves:
- Visit the official eNPS portal.
- Register using PAN, Aadhaar, or any other bank details.
- Complete your KYC verification.
- Choose from Tier I (mandatory) and Tier II (optional).
- Select the fund manager and asset allocation.
- Make the first contribution.
- PRAN is generated after verification.
Documents and information needed for enrollment
You will need:
- PAN card
- Aadhaar card or bank account for KYC
- Passport-size photograph
- Active mobile number and email ID
NRIs may need additional documentation as per RBI and FEMA guidelines.
National Pension Scheme vs. Other Retirement Plans
NPS is often compared with other long-term retirement options. Each serves a different purpose and suits different investor needs:
| Feature | NPS | EPF | PPF | Other Private Investment Options |
| Purpose | Retirement-focused pension plan | Mandatory retirement savings for salaried employees | Long-term savings with guaranteed returns | Wealth creation or retirement, depending on the product |
| Nature of returns | Market-linked | Fixed, government-declared | Fixed, government-declared | Market-linked or guaranteed, based on the product |
| Risk level | Moderate to high (depends on asset allocation) | Low | Very low | Varies from low to high |
| Lock-in period | Till retirement (partial withdrawals allowed) | Partial access before retirement | 15 years | Usually flexible |
| Liquidity | Limited | Moderate | Low | High (varies by product) |
| Tax benefits | 80C + extra ₹50,000 under 80CCD(1B) | 80C | 80C | Depends on the product |
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Conclusion
The National Pension Scheme is a structured, low-cost retirement option designed for long-term savings. It offers tax benefits, portability, and market-linked growth, but comes with limited liquidity and no guaranteed returns.
NPS works best as a retirement-focused component of a broader portfolio. For investors who value discipline, tax efficiency, and long-term planning, it can play an important role in building retirement income.
FAQs on National Pension Scheme (NPS)
You can open a NPS account if you are between 18 and 70 years at the time of entry. As per the latest updates, an existing NPS account can be continued up to the age of 85 years, subject to conditions prescribed by the regulator. (Note: Minors (0-18 years) can now join via the NPS Vatsalya scheme, which converts to a standard Tier I account at age 18.)
No, NPS is an individual retirement account. Joint accounts are not permitted. Each subscriber is issued a unique PRAN (Permanent Retirement Account Number), and a person cannot hold more than one NPS account.
The minimum contribution rules depend on the account type:
Tier I account:
Minimum contribution per year: ₹1,000
Minimum contribution per transaction: ₹500
Tier II account:
Minimum contribution per transaction: ₹250
No annual minimum requirement
To check and manage your NPS account online, log in to your Central Recordkeeping Agency (CRA) portal—Protean, KFintech, or CAMS—or use the UMANG app with your PRAN and password. From there, you can view your holdings, download statements, and manage contributions. You can also get balance updates through missed calls or SMS.
In case of the subscriber’s death:
100% of the accumulated NPS corpus is paid to the nominee or legal heir
The nominee can choose to withdraw the entire amount
Alternatively, they may opt to purchase an annuity if they wish
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
