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  7. National Pension Scheme (NPS) 2025 – Features, Benefits & Tax Rules

National Pension Scheme (NPS): Key Features, Benefits, and Withdrawals (2025 Update)

Updated on: 18 Jun, 2026 03:57 PM

The National Pension Scheme (NPS) is an Indian government-backed retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It aims to help Indians build a retirement corpus with tax benefits and disciplined investments. Government employees are mandatorily enrolled in NPS, but private-sector individuals and self-employed can opt in voluntarily.

Here’s a breakdown of how NPS works today—its features, eligibility, tax advantages, withdrawal rules, and how you can use it to save tax effectively.

Contents

What is NPS?

NPS is a retirement savings plan where subscribers contribute regularly (or in lumpsums) during their working life. These contributions grow over time through market-linked investments. At retirement, part of the accumulated amount can be withdrawn as a lump sum, and the rest is converted into an annuity (regular pension).

PFRDA opened NPS to all Indian citizens (resident, non-resident, and Persons of Indian Origin) between the ages of 18 and 70 years.

Objectives of NPS

  • To build a substantial retirement corpus that ensures financial stability post-retirement.
  • To promote regular saving habits and financial discipline during working years.
  • To provide social security support to senior citizens and reduce old-age financial burden.
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Eligibility

You can join NPS if you meet the following criteria:

Criteria Details
Age 18-70 years
Nationality Indian citizens (resident & non-resident), PIOs / OCIs (as per PFRDA rules)
KYC Requirements Proof of identity, address, and other documentation as needed

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Types of NPS Accounts

NPS offers two types of accounts: Tier-I and Tier-II.

Tier-I Account

  • This is the primary retirement account with withdrawal restrictions.
  • Minimum initial deposit: Rs 500.
  • Withdrawals are mostly restricted until retirement (with limited early exit options).
  • Contributions to Tier-I qualify for tax benefits under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) (where applicable) in the old tax regime.

Tier-II Account

  • Optional account; you can open Tier-II only if you have a Tier-I account.
  • Flexible withdrawal terms, no long lock-in.
  • Minimum deposit: Rs 1,000
  • Contributions to Tier-II do not generally qualify for tax deductions (except in limited cases for central government employees).

Tax Benefits (2025)

Important Note: From FY 2024-25 onward, the new tax regime changed many tax deduction rules. Many benefits under Sections 80CCD(1) and 80CCD(1B) are not available under the new regime.

Here’s a clear breakdown:

Section What You Can Claim Old Regime What You Can Claim New Regime
80CCD(1) Up to Rs 1,50,000 (this is included within the overall 80C limit) Not available
80CCD(1B) Additional Rs 50,000 over and above the 80C limit Not available under the new tax regime
80CCD(2) (Employer contributions) Up to 10% of employee’s basic + DA (older rules) Up to 14% of basic + DA for employer contribution deduction (for FY 2024-25 onward under new regime)

Other points:

  • Total deduction under 80C + 80CCC + 80CCD(1) is capped at Rs 1.5 lakh.
  • The extra ₹ 50,000 under 80CCD(1B) is in addition to the 1.5 lakh limit.
  • Under the new regime, only employer contributions (80CCD(2)) are eligible for deduction.

How to Invest & Claim Tax Benefit

Open an NPS Account

  • You can do this online via the official NPS portal or offline through a PoP (Point of Presence) registered with PFRDA.
  • Complete KYC, submit documents, make minimum contributions, and you’ll get your Permanent Retirement Account Number (PRAN) and login credentials.

Contribute

  • Invest regularly in Tier-I (Tier-II if desired).
  • Ensure you make your investments before the financial year ends to claim tax deduction in that year.

Claim Deduction

  • While filing Income Tax Return (ITR), enter your contributions under the applicable sections (80CCD etc.).
  • Use the old regime if you wish to avail deductions of 80CCD(1) and 80CCD(1B) unless new regime benefits (like 14% employer deduction) are more favorable for you.

Withdrawals & Retirement

  • On reaching 60 years or on retirement, you can withdraw up to 60% of your corpus as a lump sum (tax-free as per section 10 or related rules). The remaining 40% must be used to purchase an annuity.
  • Partial withdrawals: Under specific conditions (education, medical emergencies, etc.), you can withdraw up to 25% of your own contribution before retirement.
  • The annuity income you receive later is taxable as per your income slab.

Recent Updates & New Features (2025)

  • NPS Vatsalya scheme: Launched to allow parents / guardians to invest on behalf of minors. Contributions under Vatsalya are eligible for 80CCD(1B) deductions, similar to regular NPS.
  • Increase in employer deduction under new regime: Employer contribution deduction limit under 80CCD(2) increased to 14% for private employees in many cases.
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