What is NPS: Your Guide to Retirement Savings

February 28, 2024
what is nps

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With growing living costs and uncertainty about the future, it’s more crucial than ever for salaried professionals to plan for and prepare for Retirement. This requires us to know more about the National Pension Scheme details. But let’s first understand what is NPS.

Introduced by the Central Government of India in 2004, the National Pension Scheme (NPS) is a voluntary and pre-defined contribution retirement savings system. National Pension Scheme benefits Indian individuals with financial security and stability after retirement.

For example, a 30-year-old salaried professional who begins saving Rs. 5,000 per month in NPS may develop a corpus of Rs. 1 crore by the age of 60, assuming a 10% annual return.

Overall, NPS is a great way for salaried people to ensure their financial future and have a stress-free retirement.

What is NPS?

For those who wonder what is NPS, National Pension Scheme India, is a thoughtful initiative that allows salaried individuals to save some part of their income into their NPS account to gain compound interest and monthly pension post-retirement.

Here are the National Pension Scheme details:

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Types of Accounts Available Under NPS

The following are two types of accounts under NPS:

Tier 1 NPS Account

NPS Tier 1 account is a retirement savings account requiring a minimum contribution of RS. 500 at the time of account opening. In the Tier 1 account, you can make a withdrawal of up to 60% of the total amount. And, the 40% is used to provide a consistent monthly income in the form of a pension.

Tier 2 NPS Account

Whereas, the NPS Tier 2 account is an open-access account requiring a minimum contribution of Rs.1000 at the time of account opening. You can either withdraw the full corpus as a flat amount or make unlimited withdrawals.

Eligibility Criteria for Opening an NPS Account

After you are aware of what is NPS and the types of accounts in NPS, it is important to know about its eligibility.

The National Pension Scheme eligibility for a resident or non-resident Indian citizen is as follows:

  • The applicant must be between the ages of 18 and 60 at the time of application to the POP/ POP-SP.
  • The applicant must follow the Know Your Customer (KYC) guidelines outlined in the Subscriber Registration Form.
  • All of the documentation necessary for KYC compliance and the money you’ll have upon maturity must be presented.

Tax Benefits Associated with NPS Contributions

After you know what is NPS, know the following National Pension Scheme tax benefits as per the Income Tax Act 1961:

Employee tax benefits for self-contribution

a) Tax deduction of up to 10% of pay (Basic + Dearness Allowance) (Section 80 CCD(1)), subject to a total limit of Rs. 1.50 lakh (Section 80 CCE.)

b) A tax deduction of up to Rs. 50,000 (Section 80 CCD(1B)) in addition to the total limit of Rs. 1.50 lakh (Section 80 CCE).

Tax benefits to self-employed

a) Tax deduction of up to 20% of gross income (Section 80 CCD (1)), subject to a total limit of Rs. 1.50 lakh (Section 80 CCE).

b) A tax deduction of up to Rs. 50,000 (Section 80 CCD(1B)) in addition to the total limit of Rs. 1.50 lakh (Section 80 CCE).

Tax benefits on partial withdrawal from the NPS account

NPS tax exemption on the withdrawal of up to 25% of the self-contribution, subject to PFRDA’s terms and limitations (section 10(12B)).

Tax benefits on purchase of Annuity

Section 80CCD(5) allows for a tax exemption on the purchase of an annuity or superannuation when you reach the age of 60. However, the following income from an annuity is taxed under section 80CCD(3).

Tax benefits on lump sum withdrawal

Section 10(12A) allows for a tax exemption on a lump sum withdrawal of 60% of total pension assets upon reaching 60 years or superannuation.

Tax benefits to Corporates/ Employers

Employees get a tax deduction on the employer contribution to their NPS account. Up to 10% of their pay (Basic + Dearness Allowance), as a ‘Business Expense’ from their Profit & Loss Account (section 36(1)(iv)(a)).

Importance of Retirement Planning

It’s important to understand not just what is NPS but also its importance.

Retirement planning is important as it:

  • Helps you achieve financial security during your golden years when you’re no longer working and earning a regular income.
  • Allows you to maintain your standard of living and cover your expenses, even when you’re not earning a regular income.
  • Enables you to set aside funds for unforeseen expenses or emergencies that may arise during your retirement.
  • Provides peace of mind, knowing that you have a plan in place to support you in your later years.

Thus, there are several advantages of starting early:

  • You have more time to save and invest, which can lead to greater financial security in retirement.
  • You can take advantage of the power of compound interest.
  • You have more time to adjust your retirement plan if your circumstances change.

How to Open an NPS Account?

The next question after what is NPS arises how to open an NPS account?

There are two ways to open your NPS account either Online or Offline.

Steps to Open an NPS Account

Here are the steps to open an NPS account both online and offline:


  1. Firstly head to the eNPS website.
  2. The NPS account must be connected to your mobile number, Aadhaar, and Permanent Account Number (PAN).
  3. Your registered cellphone number will be given an OTP to complete the validation.
  4. After completing registration, you (the subscriber) will receive a Permanent Retirement Account Number (PRAN), which you may use to log in to your NPS account.


  1. Locate the nearest point of presence (PoP) and fill up an NPS subscription form.
  2. Fill out the subscription form.
  3. Attach photocopies of your KYC papers, like Aadhaar card, passport, PAN card, etc.
  4. If you are an existing customer of the bank, you do not need to submit the KYC papers because your KYC information is already in their database.
  5. Make your first deposit into your account. It should not be less than Rs.500 (tax included). You will also be required to pay a one-time registration charge.
  6. The PoP will provide you with your PRAN. The PRAN and password will be included in the welcome kit.

Documents Required to Open an NPS Account

The following documents are required for opening an NPS account, according to the NSDL website:

CircumstancesDocuments Required
In case you have already undergone KYC.1. ZIP file with Aadhaar Paperless Offline e-KYC.
2. Scanned copies of PAN and cancelled cheques in jpeg, jpg, png, and pdf formats with file sizes ranging from 4 KB to 2 MB.
3.Signature and photos scanned in jpeg, jpg, and png formats ranging from 4 KB to 5 MB.
sizes ranging from 4 KB to 2 MB.
Signature and photos scanned in jpeg, jpg, and png formats ranging from 4 KB to 5 MB.
In case you haven’t already undergone KYC.• Address Proof such as:
1. Copies of your depository account.
2. Driving license.
3. Electricity bill.
4. ID proof from local MP, MLA, gazetted officer, and municipal councillor.
5. Identity card issued by your employer.
6. PAN card.
7. Rent receipt and credit card statement.
8. School-leaving certificate.
9. Water bill.
• Date of Birth Proof
• ID Proof such as:
1. Driving license.
2. ID proof from local MP, MLA, gazetted officer, and municipal councillor.
3. Identity card issued by your employer.
4. PAN card.
5. School-leaving certificate
• Photograph

National Pension Scheme Calculator: Understanding the Basics

A retirement calculator or National Pension Scheme (NPS) calculator is an online tool that helps you estimate how much money you’ll need to save for retirement and how much income you can expect to receive during your retirement years.

The features and benefits of using an NPS calculator are:

  • It allows you to estimate your retirement corpus, which is the amount of money you’ll need to save to achieve your retirement goals.
  • It also provides an estimate of your monthly pension income, based on the amount you’ve saved.
  • It helps you make informed decisions about how much to save, how to invest your money, and when to retire.

Steps to Use the National Pension Scheme Calculator

You can either use the official NPS calculator of npstrust.org.in or any other third-party calculator.

Here are the steps to get an estimated pension amount using the official NPS calculator:

  1. Visit npstrust.org.in.
  2. Enter your correct Date of Birth.
  3. Enter the amount you want to contribute per month towards your NPS account.
  4. Choose the age when you would want to continue contributing.
  5. After this, you will get the “Total Years of Contribution.”
  6. Use the slider to enter your “Expectation of return on investment.”
  7. Slide to choose the percentage for purchasing an Annuity.
  8. Finally, slide to choose the annuity rate.

Have a look at the following table to get a clear understanding of using the NPS calculator:

NPS calculator ParametersDetails (Assumed Figures)
Date of Birth (DoB)1 Jan 1995
Current Age28 Years (as per the DOB)
Contribution per monthRS. 500
Contributing till the age of75 Years
Total Years of Contribution47 Years
Expected return on investment10%
The percentage for purchasing an Annuity.40%
Annuity rate6%
Expected Monthly Pension After Maturity of NPSRS. 12926

Factors to Consider While Planning for Retirement with NPS

Along with what is NPS, you should also know the following important factors to consider while planning for retirement with NPS:

Age of Retirement and Expected Lifespan

Your retirement age determines the total number of years you have to do Retirement Savings. The earlier the retirement, the fewer the years of contribution to NPS and vice versa. While your expected lifespan will decide the length of time you will need to rely on your retirement savings.

Expected Rate of Return on NPS Investments

The amount you receive after the maturity of NPS depends greatly on the rate of return on your chosen NPS investment option. The greater the National Pension Scheme returns the greater the retirement savings and vice versa.

Future Expenses and Liabilities

You will need to take an estimate of your living expenses like housing, healthcare, daily expenses, travel, and other expenses after retirement. Moreover, you should also consider your outstanding loans or liabilities such as mortgages, loans, or other financial obligations that may otherwise impact your retirement savings.

Health Insurance and Emergency Funds

Your current health insurance should cover such unforeseen health costs without affecting your retirement savings. Therefore, it is also important to maintain an emergency fund to cover such medical or unexpected expenses.

Start Retirement Savings for Stress-Free Post- Retirements Life

To sum up what is NPS, National Pension Scheme (NPS) is a powerful financial tool that allows salaried individuals to save funds for their post-retirement years. The National Pension Scheme calculator allows you to get an estimated monthly pension you will receive in your golden years.

It is important to start planning for your retirement early as the earlier you start, the more years you have to accumulate funds. You should consider the factors such as the age of retirement, future expenses etc. while planning your retirement savings. Start retirement savings now!

Want to explore helpful techniques to save and grow your hard earned money? Dive in to our guide on Save Money.

Frequently Answered Questions (FAQs)

What are the benefits of NPS?

By participating in NPS, you can enjoy tax benefits on your contributions and the potential for long-term wealth accumulation through diversified investments. NPS provides flexibility in choosing pension fund managers and allows partial withdrawals. It ensures financial security during your retirement years.

What is the NPS interest rate?

The interest rate of the National Pension Scheme (NPS) is not fixed, as it depends on the performance of the investments made by the pension fund managers. The returns are market-linked and vary over time. The NPS offers the opportunity to invest in different asset classes, such as equities, corporate bonds, and government securities, which can affect the overall interest rate earned on your NPS contributions.

Is PPF better than NPS?

Comparing the Public Provident Fund (PPF) and the National Pension Scheme (NPS) depends on your specific financial goals. PPF offers guaranteed returns, tax benefits, and is suitable for long-term savings. On the other hand, NPS provides the potential for higher returns but involves market risks. Consider factors like risk tolerance, liquidity needs, and retirement planning to determine which option aligns better with your objectives.

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