What is the National Pension System (NPS) Scheme?

Published on December 29, 2025 | 4 min read

For those looking to build a retirement corpus, the National Pension System (NPS) emerged as a trusted investment option. Pension Fund Regulatory and Development Authority (PFRDA) regulated NPS scheme, whose sole purpose is to accumulate an adequate amount of corpus for receiving a pension after retirement.

Launched in 2004, the NPS is a central government-backed investment scheme designed to provide every NPS investor with a steady income through an annuity after retirement. The NPS initiative allows individuals to save money systematically for their retirement while they are employed. It’s a market-linked scheme in which individuals can make contributions on a regular basis for a longer period of time and enjoy benefits after retirement.

How NPS Works?

Under the NPS scheme, the investor's contributions were invested in a mix of different asset classes, such as Equity for growth, corporate bonds for stable returns, government bonds for safety, and alternative investment funds for diversification.

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The fund is managed by professional pension fund managers, with very low management fees, typically around 0.01% to 0.09% per year.

NPS is flexible, allowing investors to edit their asset allocation periodically and offers a partial withdrawal option in Tier-1 for specific purposes. The full withdrawal is allowed only at retirement age, with a portion mandatory used to purchase an annuity.

Types of NPS

The NPS scheme operates through two main types. Tier 1 and Tier 2 accounts. Here is a brief of both accounts.

1. Tier-1 Account: It is the primary retirement account in NPS, mandatory for all salaried individuals. It is specifically designed for building a retirement corpus.

All investors in Tier 1 must contribute ₹500 annually to keep the account active.
The contributions can be invested in various asset classes, such as equities, bonds, and debt. Investors can choose the allocation themselves or let the fund manager decide.
Contributions are eligible for tax deductions under Section 80C and Section 80CCD of the Income Tax Act.
Restrictions on withdrawal, lock-in till age 60. Only a limited portion of one's own contribution is allowed for partial withdrawal in emergencies, which is tax-free.

2. Tier-2 Account: It is a voluntary savings account under NPS, offering more flexibility in investment and withdrawals. However, to enjoy the benefits of a Tier-2 account, investors must upgrade their existing Tier-1 account. In short, a Tier-2 account cannot be directly opened.

Minimum ₹1000 contribution required to upgrade to a Tier-2 NPS account.
This type of NPS account does not offer any tax benefits.
Investors get an option to invest in the same asset classes as Tier-1, but with more flexibility in managing funds.
No lock-in period, investors can withdraw the funds anytime without restrictions.
Withdrawals are taxable according to the individual's income tax slab.

Who Can Invest In NPS Scheme?

The NPS investment option is available to all Indian citizens and non-resident Indians (NRIs). It is suitable for any central government employees, state government employees, private sector employees, and self-employed individuals. Any person between the age of 18 to 70 is eligible to invest in NPS. To check out the top pension funds, visit Upstox.

Advantages of Investing in NPS

The NPS investment scheme comes with a variety of benefits. Below are a few advantages that help to plan your retirement smartly.

Equity-Linked Returns

NPS is a market-linked scheme, which means if the stock market performs well, then returns can be higher, boosting the overall retirement corpus.

Nominal Investment

The minimum investment to start with a Tier-1 account is ₹500, and for Tier-2 is ₹1000 annually, making it affordable for a large number of individuals.

Easy Documentation

Opening an NPS account is easy and simple. It can be opened online or offline with minimal paperwork and easy account management.

Tax Benefits

NPS Tier-1 account provides significant tax deductions under Section 80C and Section 80CCD, reducing the overall tax liability.

Risk Management

Investors get an option to allocate the funds across various asset classes. It facilitates investment as per the investor’s risk tolerance. Any person looking to take a moderate risk can allocate a higher portion to debt compared to equity.

Disadvantages of Investing in NPS

Before investing in NPS its important to know the disadvantages of investing in this asset class.

Capped Limit in Equity Investment

NPS is a market-linked scheme, but the portion of equity investment is capped at 75% of the total corpus. Limiting the potential for higher returns from the market in the bull phase. (A market phase where the market is positive on the majority of days and the trend is upward).

Mandatory Annuity Purchase

The mandatory requirement to invest 40% of the corpus in an annuity plan is a limitation as it restrict to use of the entire corpus as lumpsum. An annuity is a financial arrangement that provides regular pension income after retirement.

Tax on Annuity and Pensions

Taxes are levied on the amount used to purchase an annuity and on the pension received. It can reduce the overall net income during retirement.

The National Pension System (NPS) scheme is a flexible and smarter way of building retirement savings. The unique feature of NPS is that it’s an equity market-linked scheme and has tax deductions, making it a suitable investment option for many individuals.

About Author

Subhasish Mandal

Sub-Editor

finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.