What is NPS and How it Works?

Table of Content

1. How Does the NPS Scheme Work?

2. How to Open NPS Account?

3. How to Log in to the NPS Account

4. Who Should Invest in the NPS?

5. Types of NPS

6. Features and Benefits of NPS

7. How is NPS Calculated ?

8. NPS Withdrawal Rules after Retirement (60 years)

9. Equity Allocation Rules

10. Option to Change the Scheme or Fund Manager in the NPS

11. National Pension Scheme Eligibility

12. How to Invest in NPS?

13. FAQs on NPS?

The National Pension Scheme (NPS) is a market-linked, government-backed retirement savings programme designed to help individuals build a secure financial corpus for their post-retirement years. If you are looking to understand what is National Pension Scheme, it is a voluntary and flexible scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Any Indian citizen, resident or non-resident, aged 18 to 70, can open an NPS account with a minimum investment of ₹500 for Tier I.

One of the key benefits of the National Pension Scheme is its flexibility; subscribers can choose fund managers and investment options based on their risk appetite. NPS offers two account types: 

• Tier I is the primary retirement-focused account offering tax benefits.

• Tier II is optional, follows flexible NPS withdrawal rules and is suitable for meeting short-term goals. 

To get started, individuals must register online and obtain a Permanent Retirement Account Number (PRAN). Contributions are invested in a mix of equities, corporate bonds, and government securities, growing over time through market returns. At retirement, 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to buy an annuity plan to ensure a steady monthly income.

How Does the NPS Scheme Work?

The National Pension System (NPS) is a government-run, voluntary retirement savings plan that helps people save for a long-term retirement. Anyone who is an Indian citizen or an NRI, aged 18 to 70, can open an NPS account. 

There are two account types: 

• Tier I (required, retirement-focused)

• Tier II (optional, withdrawal-friendly). 

Each one has its own benefits and levels of flexibility.

You need to open an NPS account and start contributing to it every month or year, depending on what works best for you. To keep an NPS Tier I account open, you have to put in at least ₹1,000 a year. The Pension Fund Regulatory and Development Authority (PFRDA) oversees fund managers who invest this money in a variety of ways, including bonds, stocks, and company debentures.

When you turn 60, you can withdraw 60% of the corpus in a single payment. The other 40% must be used to buy an annuity from NPS, which will give you a steady monthly income after you retire. You can only withdraw early if you have contributed for 10 years, and some of the money must still be used to buy an annuity. If the subscriber dies, the entire accumulated corpus is given to the nominee, with no restrictions on its use. 

 NPS helps you build a longterm retirement corpus. But combining it with a good suitable life insurance plan can safeguard your family financial. 

National Pension System ensures stability after retirement income through annuity purchases. Whereas life insurance offers essential protection by providing a financial safety net to your dependents in case of an unfortunate event. 

Integrating NPS with a life insurance policy like a term insurance plan or annuity-linked life cover—individuals can safeguard their retirement goals while ensuring that their loved ones remain financially protected. 

Choosing an annuity plan from an Annuity Service Provider (ASP), along with a reliable life insurance solution, creates a comprehensive retirement and protection strategy for long-term stability.

How to Open NPS Account? 

Now that you understand what is NPS, let us look at how to open an NPS account. You can enrol in NPS either online or offline. Online is the quickest option, while central and state government employees usually register through their HR or accounts office. Self-employed individuals and traders can register via the official website, the mobile banking app, or at a nearby branch.

Online Process to Open NPS Account 

Registering for NPS online is a convenient and secure option compared to an offline process. Here is a detailed guide on: 

Through NPS Official Website 

Let us go through the steps to follow for opening an NPS account using the government official website:

Step 1: Visit the eNPS portal and select a Centra Recordkeeping Agency (CRA) of your choice. 

Step 2: Select as an individual subscriber, click on “Register Now”. 

Step 3: Enter personal details such as name, date of birth, PAN number, mobile number, and email ID.

Step 4: You will receive an OTP on your registered mobile number, and you will then confirm your location. 

Step 5: There will be two OTP verifications, one on your mobile and the other on your email.

Step 6: Once the KYC formalities are complete, verify other details, including father’s name, marital status, and so on. 

Step 7: Upload a photo and your signature, and click on Confirm. 

Step 8: Choose the fund manager, investment option, bank and nominee details. 

Step 9: Once all sections are filled in, proceed to receive an Acknowledgement ID.  

Step 10: Within 15 days, confirm your registration using the Acknowledgement ID and generate your Permanent Retirement Account Number (PRAN). 

Through Mobile App (iMobile or Bank App) 

If you prefer to have  access to your NPS account on the go, this method is ideal: 

Step 1: Log in to your mobile banking app and navigate to the NPS section.

Step 2: Enter the investment amount along with personal and nominee details. 

Step 3: Upload a passport-size photo and signature. 

Step 4: After verifying all the details, submit your application.

Step 5: Please note that during this process, OTP verification will be required. Do not share OTP details with anyone. 

Step 6: Once the OTP verification is complete, you will get a notification of successful submission.  

Through Net Banking

Offline Process to Open NPS Account 

For offline NPS account opening, you need to visit your nearest Pop-SP (Point of Presence) service provider.

Step 1: Visit a registered bank branch that offers NPS services.

Step 2: Carry all KYC documents, including ID proof, address proof, and a passport-size photo. 

Step 3: Fill out the NPS registration form. 

Step 4: Transfer the initial contribution (1000 or 500)

Step 5: After verification, the bank will activate your account within a few days.

How to Log in to the NPS Account

Once you create your NPS account, you can log into the account through various portals including the KFintech portal, NSDL NPS or net banking.

Here is a detailed overview of logging into your NPS account through the above-mentioned portals:

• Through the NSDL NPS Portal

If you are logging into the NSDL NPS portal for the first time, you will have to register yourself to the official site by creating a new password. Follow the below steps to complete the procedure:

Step 1: Login into the official portal of NSDL NPS and select ‘Login with PRAN/IPIN’.

Step 2: To create a new password, select ‘Reset Password’ on the displayed login screen.

Step 3: Enter all your necessary details including Permanent Retirement Account Number (PRAN), new password and your date of birth. After this, confirm the entered password and the CAPTCHA. Click on ‘Submit’.

Step 4: Upon submission, an OTP will be sent to your registered mobile number. Enter the required OTP and confirm the new password. This will thereby enable you to log into your E-NPS account with a new password and PRAN.

If you are an existing NPS account holder in the NSDL portal, follow the below steps to log in:

Step 1: Enter the PRAN and password and log into the portal.

Step 2: Submit all the necessary details to access your E-NPS account.

• Through the KFintech NPS Portal

If you are new to the KFintech NPS portal, follow the below-mentioned steps to log in:

Step 1: Visit the official portal of KFintech NPS.

Step 2: Go to ‘Login’ and select ‘Existing Subscriber’. On the page displayed, click on ‘Reset Password’.

Step 3: Next, enter all the necessary information including your PRAN, date of birth and Captcha Code. Once provided, click on the 'Submit' button.

Step 4: You will receive an OTP on your registered mobile number. Provide the OTP and then create a new password. This will thereby allow you to log into your E-NPS account.

If you are an existing customer, follow the below steps to log into the KFintech NPS Portal:

Step 1: Login into the portal and then click on ‘Existing Subscriber’.

Step 2: On the displayed login screen, enter your details including password, PRAN and CAPTCHA code to log in.

Who Should Invest in the NPS?

After learning what is NPS, if you are eligible to invest, here is a detailed guide on who should invest in NPS. The Scheme (NPS) is designed for individuals looking to build a steady retirement plan through long-term, disciplined contributions. Both salaried and self-employed individuals can invest in such a plan. 

NRIs (Non-resident individuals) can also invest in this plan, provided they meet the eligibility criteria, such as being between 18 and 70 years old and owning an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account. 

Investors looking for tax savings options can also contribute to a Tier I NPS account. Under Section 80C (₹1.5 Lakh), and Section 80CCD¹ (1B) ₹50,000, contributions towards NPS are eligible for a total tax deduction up to ₹2 Lakh. 

NPS helps in securing long-term financial security and post-retirement income through annuity benefits.

Types of NPS

Depending on what type of NPS you choose, the benefits differ. Check out the following section to know which NPS account is most suitable for you:

What is Tier 1 in NPS? (Tier I)

NPS Tier I is a primary account that has long-term growth potential and tax benefits. Anyone aged 18 to 70 is eligible for this scheme. The funds in the Tier I account are a mix of government bonds, equity, and corporate debt. The amount remains locked in until the subscriber turns 60, ensuring steady accumulation of the retirement fund.

When you contribute to the Tier I account, the amount remains locked in until you retire, so you can be sure your funds accumulate steadily.

Benefits of Tier I NPS Account:

• No restrictions on shifting the NPS Tier I account while shifting jobs and locations.

• Tax benefits under Section 80CCD(1)¹ and 80CCD(2)¹.

• Allows investors to choose an annuity option, providing a steady monthly income stream post-retirement.

• Partial withdrawals of up to 25% are allowed in specific circumstances, such as for critical illness, a home purchase, or a wedding.

What is Tier 2 in NPS? ( Tier II)

NPS Tier II is a voluntary, flexible account where subscribers can contribute and withdraw funds at any time without restrictions. However, contributions to Tier II are not eligible for NPS tax benefits. To open a Tier II account, subscribers must first have an active Tier I account.

Benefits of Tier II NPS Account:

• It is one of the best ways to save for your day-to-day expenses.

• No annual minimum contribution requirement; only a minimum of ₹1,000 to open the account and ₹250 per transaction thereafter.

• Investors can withdraw funds from this type of account online using CRA (Central Recordkeeping Agency) login credentials.

• No annual maintenance charges are required.

• Tier II accounts have liquidity and investment flexibility.

• Scheme holders have the flexibility to choose different investment instruments than Tier I.

Features and Benefits of NPS

Now that you know what is NPS, what are its types? Let us look at some of its features and benefits:

1. Flexibility

NPS subscribers have enough control and adaptability to manage their retirement corpus effectively. They can choose to invest based on their risk appetite and return expectations. They also have the freedom to switch fund managers or investment schemes if they find a certain fund is not performing well in the market.

2. Returns/Interest

Since a part of the NPS contribution is allocated to equities, there is a chance of market-linked returns, which are higher than those from traditional tax-saving instruments. Usually, annualised returns from NPS range from 9% to 12%. Returns depend on the type of fund you choose and its market performance. NPS subscribers can change fund managers to optimise growth.

3. Dual benefit of Low Cost and Power of Compounding

Compared to other pension funds, NPS has lower account maintenance costs. For example, the annual maintenance charge for an NPS account is ₹69. The dual benefits of market-linked growth from disciplined investment, along with the lowest maintenance charge, make NPS one of the most desirable options for those seeking a stable, long-term retirement savings plan.

4. Regulated

Since NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), it ensures transparent investment norms. These regulations ensure accountability, trust, and disciplined fund management for retirement savings. Furthermore, regular performance reviews and fund management protect subscriber interests.

5. Online Access

Online accessibility of the NPS account makes it easier for subscribers to open and manage their accounts from anywhere in the world, including for non-resident Indians (NRIs). Whether it is contributions, account monitoring, or fund management, easy accessibility offers convenience, control and transparency over retirement savings.

6. Portable

Subscribers can smoothly port NPS accounts across cities and jobs without interruption. Suppose you have opened an NPS account while working in Kolkata. Now that you have a new job in Bangalore, you need to relocate. In this case, you do not need to create a new NPS account; you can simply port your existing NPS account and continue with the same fund manager and scheme. This way, portability offers flexibility and continuity in building retirement savings.

How is NPS Calculated ?

Besides knowing what is NPS scheme, understanding its calculation is crucial. The NPS calculation depends on the investment returns, contributions, and compounding over the investment period. Here is the formula to calculate NPS:

(A = P(1 + r/n)^nt)

A = Final corpus amount

P = Principal

n = compounding frequency

t = investment duration

Contributions of Salaried Individuals

NPS contributions come as a fixed percentage of the basic salary and dearness allowance for salaried employees. For corporate sector employees, the employers contribute up to 10% of their basic monthly salary towards NPS. For central government employees and bank staff, the percentage is 14%. These regular investment grows through compounding.

Contributions of Self-Employed Individuals

Self-employed individuals or traders can join NPS between 18 and 40 years of age and contribute monthly until they reach 60. To contribute, they can use the auto-debit facility of their bank account.

Depending on your preferences, the NPS contributions are invested across different asset classes, such as equity, government securities, corporate bonds, and alternative assets. Since NPS returns are market-linked, they fluctuate with market performance.

Therefore, to ensure growth and stability, professional pension fund managers (PFMs) manage your contributions. Even though your final retirement corpus may vary, with disciplined, long-term investments, you can build a sizeable corpus to enjoy a comfortable post-retirement life.

NPS Withdrawal Rules after Retirement (60 years)

You cannot withdraw money from NPS until you attain 60 years of age. Following NPS withdrawal rules, upto 60% of the total corpus withdrawn in lump sum is exempt from tax. With the remaining 40% corpus, you need to purchase an annuity (pension) plan.

For example, at maturity, your invested sum is Rs. 1 crore. In this scenario, you can withdraw up to 60% of Rs. 1 crore i.e., Rs. 60 lakh as a lump sum once your NPS account matures without paying any tax. The rest 40% of the amount must be utilised to purchase annuity from an empanelled Annuity Service Provider (ASP). Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.

However, under any unforeseen circumstances, you might need some funds in an emergency. Taking this into consideration, NPS allows you to withdraw funds partially before NPS matures.

A. Partial Withdrawal

Before maturity, you can make partial withdrawals from your NPS account for specified purposes. PFRDA under emergency, allows you to withdraw after three years but only 25% from your Tier 1 account.

Amount received from partial withdrawal are tax exempt u/s 10 (12B) of Income Tax Act.

Equity Allocation Rules

Equity allocation in the NPS scheme refers to the percentage of your investment allocated to equity. Since equity investments are market-linked, it is crucial to balance both growth potential and investment risks, particularly when long-term retirement is of concern.

There are two ways to manage your equity exposure that we have discussed in detail below:

• Auto Choice

In this option, your equity exposure is automatically adjusted based on your contribution and age. Usually, younger investors start with a higher equity allocation to take advantage of better growth prospects. As they grow older, their equity exposure gets reduced to minimise risks. So, they can maintain stability when retirement approaches.

For example, under the central and state government scheme, there are three fund managers: LIC Pension Fund Limited, SBI Pension Fund Private Limited, and UTI Pension Fund Limited. As per PFRDA guidelines, in this scheme, 85% of contributions are invested in fixed-income instruments and 15% in equity.

• Active Choice

In this option, based on your personal risk appetite and financial goal, you have the flexibility to determine how much of your contribution goes to which asset class. However, you must ensure that the total allocation across all asset classes equals 100%. Currently, in the active choice option, the equity allocation is restricted to 75%.

Based on your allocation rules, your potential returns and risk exposure are influenced. Therefore, you need to maintain the right balance between growth and risks throughout your investment journey.

Option to Change the Scheme or Fund Manager in the NPS

If you are not happy with your current fund manager’s performance, you can change the scheme or the fund manager. This is applicable for both Tier I and Tier II account holders.

National Pension Scheme Eligibility

NPS eligibility is primarily based on the subscriber’s age, citizenship and KYC compliance. Check out the NPS eligibility in the following section:

• Any Indian citizen (resident or non-resident) and an overseas citizen of India (OCI) can open an NPS account.

• The age criteria for the NPS account are 18-70 years.

• An NPS account must be an individual account; it cannot be opened on behalf of someone else.

• PIOs (Persons of Indian Origin) and Hindu Undivided Families (HUFs) are not eligible for NPS.

• KYC documents, including your identity proof, address proof, PAN card, and bank account details, are necessary.

How to Invest in NPS?

A Guide to Investing in NPS

To subscribe to the NPS, an individual needs to open an account at a Point of Presence or POP Alternatively, one can also sign up for an NPS account online. Most public and private sector banks and several financial institutions are listed as POPs. Certain Point of Presence Service Providers (POP-SPs) are also authorised collection points where individuals can open accounts. The full list of POPs and their corresponding locations can be found on the Pension Fund Regulatory and Development Authority's (PFRDA's) website.

In order to enrol in the NPS scheme, investors will need to submit the following documents at the POP:

• Permanent Account Number (PAN) Card

• Aadhaar Card

• Address Proof

• Identity Proof

• Passport-Sized Photographs

Making Contributions

Individuals can contribute to the NPS either directly or through their employer, if their employer offers NPS as a benefit option. Direct contributions can be made online through the eNPS or via cash or cheque. On the other hand, for contributions that are routed through the employer, subscribers will need to get in touch with their HR or Compensation and Benefits (C&B) team. You can leverage NPS as one of the one-time investment plans where you can invest ones and reap benefits for the long term.

Minimum Contribution Required

For Tier I Accounts

Investing in a Tier I NPS account is most suitable for those with a long-term retirement savings plan. In addition, if you are looking for simplified eligibility and tax benefits, a Tier I account is an ideal choice.

Here is how much you need to contribute for a Tier I NPS account:

• You have to start investing in a Tier I account with at least ₹500.

• The annual minimum contribution towards an NPS Tier I account is ₹1,000.

• Subscribers must maintain this amount to keep their accounts active.

• The minimum per-transaction contribution is ₹500; you can contribute multiple times.

• There is no upper limit on contributions, which offers flexibility and lets you invest more.

For Tier II Accounts

Tier II accounts are perfect for those looking for flexibility and easy accessibility of their funds. Whether it is freedom to withdraw or meeting short-term financial goals, investing in a Tier II NPS account is a good idea.

Here is how much you need to contribute for a Tier II NPS account:

• You need to open a Tier II account with a minimum of ₹1000.

• Subsequent contributions towards this account need to be ₹250.

• There is no upper limit on Tier II contributions.

Note: Tier II does not offer tax benefits; it’s for liquidity and flexibility.

FAQs on NPS?

1. Who is eligible for the NPS scheme?

Any Indian citizen aged whether Resident or Non Resident aged between 18 and 70 years is eligible to invest in the NPS scheme. Citizens are eligible to join the NPS scheme as individuals or employee-employer groups.

However, Hindu Undivided Families and Persons of Indian Origin are not eligible for subscribing to NPS.

2. What are the Tier 1 and Tier 2 NPS accounts?

Tier I and Tier II are two different types of NPS accounts.

Tier-I account: This is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer and are credited and invested as per the scheme/fund manager chosen by you. Here withdrawal are as per Exit & Withdrawal rules and regulations as prescribed.

Tier-II account: This is a voluntary / optional withdrawable account which is allowed only you have an an active Tier I account. The withdrawals are permitted from this account as and when you require.

Tier I is the basic and primary NPS investment account and account holders can enjoy tax benefits under this account. However, this account has certain restrictions on withdrawals and you can withdraw only once you meet the NPS exit conditions.

On the other hand, Tier II allows you to withdraw at any time but it offers no tax benefits.

3. Is it good to invest in NPS?

If you are planning for retirement at an early age or seeking to avail tax benefits under 80C deductions, it will be ideal for you to invest in NPS.

4. Is NPS tax-free on maturity?

Up to 60% of the Investment corpus at maturity can be withdrawn without paying any taxes. The remaining 40% has to be invested in annuities which is also exempt from tax. Only annuity income that you receive in subsequent years will be subject to income tax under Section 80CCD(5).

5. What is the NPS interest rate?

NPS interest rate keeps on fluctuating since it is market-linked. At present, the NPS returns rate is between 9%-12% per annum for minimum of 3 years period, depending on the scheme.

6. Is there NPS for private sector employees?

You are eligible to open your NPS account if you work in any corporate who has adopted the NPS scheme and fulfil the eligibility criteria of being an Indian citizen aged between 18 and 70 years whether resident or Non Resident..

7. Do I earn a fixed return on NPS?

NPS does not offer any fixed returns. The returns under NPS are market-linked.

8. Will I get the tax benefits on investment in NPS Tier-II account?

No tax benefits are available on contributions made in an NPS Tier-II account.

No tax rebates/special treatment for the gains arising out of investment in NPS Tier-II are available. The taxation as per the marginal tax rate will be applicable to you.

9. What is an NPS account, and how does it work?

The National Pension Scheme (NPS) is a well-known government-backed retirement and savings scheme for Indian citizens aged 18 to 70. It helps users to grow their savings while they are still working, so they can accumulate enough corpus to spend their retirement comfortably.

After investing a minimum of ₹6000 annually in your NPS account, the PFRDA invests the amount. Over time, this market-linked profile grows in line with market performance. When you retire, you can withdraw 60% of the total amount as a lump sum, and use the remaining 40% to buy an annuity to ensure a steady monthly income stream post-retirement.

10. What is the benefit of NPS?

When it comes to ensuring a financially secure retirement, there is no better alternative to NPS. First of all, NPS offers flexibility in choosing investment instruments, allowing you to allocate funds based on your investment decisions. In addition, under Section 80CCD (1) of the Income Tax Act, 1961, NPS account holders are eligible for tax deductions up to ₹1.5 Lakh annually.

Annuity Service Providers:

PFRDA is a statutory body set up by the Government of India to regulate and develop the pension sector in India. An annuity pension is a type of pension in which the pensioner receives a fixed monthly income as per terms and condition of the plan

The relationship between PFRDA and ASPs (Annuity Service Providers) is that PFRDA is the regulator of the National Pension System (NPS), and ASPs are the entities that provide annuity services to NPS subscribers. When an NPS subscriber reaches the age of 60, they are required to annuitize at least 40% of their pension wealth. They can do this by purchasing an annuity from an ASP that is empanelled by PFRDA

You can select any of the annuity schemes offered by Annuity Service Providers (ASPs) registered with IRDAI and empaneled with PFRDA. HDFC Life is one of the registered ASPs for annuity issuance and further servicing.