Is NPS Good for Salaried Employees?
Written by Mariyam Sara
2 min read | Updated on December 04, 2025, 17:57 IST
National Pension Scheme, often known as NPS, is specifically designed for investors planning for their retirement. From 2003 onwards, public sector employees lost their defined pension benefits and in their place, the government introduced pension schemes.
NPS allowed salaried employees the freedom to manage their retirement corpus and the option to decide the asset allocation according to their risk appetite. Let’s understand how NPS works and if it's the right investment option for salaried employees.
What Is NPS?
The National Pension Scheme is a government-backed investment option, usually opted by investors planning for a financially secure future. NPS schemes invest in various assets such as stocks, bonds, debt securities and other alternative assets.
The funds collected under NPS are managed by professional fund managers registered with the Pension Fund Regulatory and Development Authority (PFRDA).
How Does NPS Work?
The investors who opt for NPS have to deposit a fixed, specific amount of money until the age of 60. This collected money is invested across different asset classes according to the age and risk tolerance of the investors.
Investors can select which assets their money should be invested in. As the investors near retirement age, the NPS system reduces their risk exposure by lowering equity allocations and allocating more funds to low-risk investments such as government bonds.
Types of NPS Accounts
There are two types of NPS accounts:
Tier 1 Account
In a Tier 1 account, your contributions are locked until you reach the age of 60 years. You can partially withdraw your investment after 3 years from the initial date of investment. The minimum investment amount for a Tier 1 account is ₹1000.
Tier 2 Account
In a Tier 2 account, there is no lock-in period. This account offers flexibility in withdrawal and exits. The minimum investment amount required for a Tier 2 account is ₹500.
Advantages of Investing in NPS
NPS is a low-risk investment option suitable for risk-averse investors wanting to be financially independent in their old age. Here are other benefits of investing in NPS for salaried employees.
Financial Security
NPS collects and invests the savings of the investors, allowing them to withdraw the entire corpus or opt for monthly payments. This helps investors remain financially independent and have a steady income even when they are retired.
Flexibility
Investors can manually choose their asset allocation as per their return expectations and risk tolerance. You can invest in various assets such as equity, corporate bonds, government debt and other securities.
Tax Benefits
As per Section 80C of the Income Tax Act, NPS investments are eligible for ₹1.5 Lakh tax deductions with an additional deduction of up to ₹50,000 under Section 80CCD(1B) for the NPS Tier 1 scheme.
Risk Management
As per the investor’s age, NPS determines the asset allocation of the fund. Young adults have high risk tolerance and are far from retirement age. Hence, their savings can be predominantly invested in equity, offering high returns.
NPS manages the risk involved in investment by reducing the equity exposure of the investor as they approach retirement age.
Disadvantages of Investing in NPS
Despite the multiple benefits, some disadvantages discourage salaried employees from investing in NPS.
Lock-in Period
In NPS, Tier 1 account holders can withdraw their corpus after they reach the age of 60. In other schemes, you can exit after 5 years, withdrawing only 20% of your total investments, while the remaining 80% will be used for annuity.
You can partially withdraw up to 25% of the contributions for specific reasons such as marriage, education or home purchase.
Partial Tax Exemption
Only 60% of the total corpus is exempted from tax, the remaining 40% will be used to purchase an annuity plan. The amount used to purchase an annuity will be exempted from tax and the regular pensions received will be taxed according to your income tax slab.
NPS can be a suitable option for risk-averse investors who want to secure their financial future and enjoy tax benefits. Before investing in NPS, understand your risk tolerance and the corpus amount you need to build to retire worry-free. This will help you make informed investment decisions regarding your NPS.
About Author
Mariyam Sara
Sub-Editor
holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.
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