The National Pension Scheme (NPS) is a defined-contribution pension system operated by the Government of India.  The Government of India decided to move from a defined-benefit pension system to a defined-contribution pension system. Apart from offering a range of investment options to employees, the scheme allows individuals to make decisions about where their pension fund is invested, permits limited withdrawal prior to retirement and reduces the total pension liabilities of the Government of India.

The scheme is structured in two tiers. A tier-1 account is a basic retirement pension account available to all citizens from 1 May 2009. It does not permit withdrawal of funds before retirement. A tier-2 account is a Prospective payment system (PPS) account that permits some withdrawal of pension prior to retirement under exceptional circumstances, usually related to the provision of health care.


NPS is open to all citizens of India between the ages of 18 and 60 on a voluntary basis

It is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. The employee contribution is fixed at 10% per month which is matched by an employer contribution of the same amount.


PFRDA has set the following guidelines with regard to subscriber contribution:

  1. Minimum amount per contribution: Rs. 500
    2. Minimum number of contributions: 1 per year
    3. Minimum annual contribution: Rs 6,000 in each subscriber account.

The minimum contribution is Rs. 6,000 per year. There is no limit on maximum contribution.But whatever amount you invest in the scheme ,only 50000 is maximum allowed to deduction under section 80CCD of the Income Tax Act,1961.This proposes to give NPS,an additional tax benefit on investments of up to Rs 50,000 a year,over and above Rs. 1.5 lakh a year under section 80C.

Investment options

  • Under the investment guidelines finalized for the NPS, pension funds are invested in three separate asset classes. The three asset classes are equity, government securities and a range of fixed income instruments. Subscribers are able to decide how their NPS pension fund is allocated across the three asset classes.

Withdrawal norms

There is a requirement for subscribers who leave the scheme before retirement (or age 60, whichever is the earlier) to invest 80% of their accumulated savings in a life annuity from a life insurance company approved by Insurance Regulatory and Development Authority (IRDA). The remaining 20% is eligible for withdrawal as a lump sum.

On retirement, at age 60, subscribers are required to invest at least 40% of their pension fund in an annuity and the remaining 60% can be redeemed as a lump sum. In the case of government employees, the annuity provides for pension for the lifetime of the employee and his dependent parents and spouse at the time of retirement.


To a variable limit, contributions to the scheme are tax-exempt, but that withdrawals are counted as taxable income (EET). These tax benefits apply to all contributions, including those made by employers