Comprehensive Guide to National Pension System (NPS) - 2025 Edition
The National Pension System (NPS) is a government-sponsored pension scheme in India that was launched in January 2004 for government employees and later opened to all citizens in 2009. Regulated by the PFRDA (Pension Fund Regulatory and Development Authority), NPS is designed to create a retirement corpus through systematic savings.
As of 2025, NPS remains one of the most efficient tax-saving instruments and retirement planning tools, offering low-cost fund management and market-linked returns. This guide explains how NPS works, the difference between Tier I and Tier II accounts, and how to use our calculator effectively.
How the NPS Calculator Works
Our calculator uses the concept of Compound Interest on monthly contributions (SIP mode). Here is the breakdown of the logic:
- Accumulation Phase: You invest a fixed amount every month until your retirement age (usually 60). The money grows based on the "Expected ROI" (Return on Investment).
- Maturity: At retirement, you get a total corpus.
- Withdrawal Phase:
- You can withdraw up to 60% of the corpus as a Tax-Free Lump Sum.
- You MUST invest at least 40% of the corpus in an Annuity Plan (Pension Plan) from a PFRDA-approved insurer.
- The Annuity provider pays you a monthly pension for the rest of your life based on the "Annuity Rate".
Key Features of NPS
1. Tier I vs Tier II Accounts
Tier I (Pension Account): This is the mandatory retirement account with tax benefits. Withdrawals are restricted until retirement (with some partial withdrawal conditions).
Tier II (Investment Account): A voluntary savings account with no withdrawal restrictions. No tax benefits are available for Tier II (except for Govt employees under specific conditions), and it works like a mutual fund.
2. Tax Benefits (Updated 2025)
- Section 80CCD(1): Employee contribution up to 10% of Basic+DA (or 20% of Gross Income for self-employed) is deductible within the overall ₹1.5 Lakh limit of Section 80C (Old Regime).
- Section 80CCD(1B): An additional deduction of ₹50,000 is available exclusively for NPS Tier I contributions. This is over and above the ₹1.5 Lakh 80C limit (Old Regime).
- Section 80CCD(2): Employer's contribution (up to 14% for Central Govt / 10% for others) is deductible. This benefit is available under BOTH Old and New Tax Regimes.
3. Asset Classes & Choice
Subscribers can choose their asset allocation:
- Equity (E): Investments in stocks (High risk, high return). Cap at 75%.
- Corporate Bonds (C): Fixed income instruments.
- Government Securities (G): Safe government bonds.
- Alternative Assets (A): REITs, InvITs (Max 5%).
You can choose Active Choice (you decide the %) or Auto Choice (allocation changes with age).
Withdrawal Rules at Retirement (Age 60)
When you turn 60, the rules are:
- Lump Sum: Up to 60% of the corpus can be withdrawn. This amount is completely tax-free.
- Annuity: Minimum 40% must be used to buy an annuity. The monthly pension received from this annuity is taxable as per your income tax slab in the year of receipt.
- 100% Withdrawal: If the total corpus is less than ₹5 Lakhs (limit subject to revision), you can withdraw the entire amount as a lump sum.
Frequently Asked Questions (FAQ)
s (FAQ)
1. Is NPS safe?
Yes, NPS is regulated by PFRDA, a statutory body established by the Government of India. The funds are managed by professional Pension Fund Managers (like SBI, LIC, HDFC, ICICI, etc.). However, returns are market-linked and not guaranteed.
2. Can I exit NPS before 60?
Yes, but it is restricted. If you exit before 60, you must use at least 80% of the corpus to buy an annuity, and you can withdraw only 20% as a lump sum. Partial withdrawals (up to 25% of own contribution) are allowed after 3 years for specific reasons (illness, education, housing).
3. What is the expected return from NPS?
Historically, NPS equity schemes have delivered 10-12% returns, while debt schemes have delivered 7-9%. A blended conservative estimate for a long-term horizon is often taken as 9-10%.
4. Can I increase my contribution later?
Yes, NPS is flexible. You can change your contribution amount anytime. The minimum annual contribution required to keep the account active is ₹1,000.
5. What is the "NPS Vatsalya" scheme?
Discussed in recent budgets, NPS Vatsalya allows parents to open NPS accounts for minors. The account converts to a regular NPS Tier-1 account when the minor turns 18, ensuring a head start on retirement compounding.