NPS (National Pension Scheme) - Complete Guide 2024 | Benefits, Tax Savings & Withdrawal Rules

NPS (National Pension Scheme): A Complete Guide for Your Retirement Planning

Introduction:

Imagine you’re working hard today, earning well, and enjoying life. But have you ever thought—what will happen after retirement? Will you have enough money to live comfortably? Or will you depend on your children or savings that may not last?

This is where the National Pension System (NPS) comes in—a smart, government-backed retirement plan that helps you save systematically so that your future is secure.

In this detailed guide, we’ll explain everything about NPS—how it works, benefits, tax savings, withdrawal rules, and real-life examples to help you understand better.

1. What is NPS (National Pension System)?

NPS is a long-term retirement savings scheme launched by the Indian government in 2004 (for government employees) and opened to all citizens in 2009. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Think of NPS like a "PPF + Mutual Fund" mix—it helps you save for retirement while also giving market-linked returns.

Example:

Ramesh, a 30-year-old IT professional, invests ₹5,000 monthly in NPS. By the time he retires at 60, his investment grows into a big corpus (thanks to compounding). He gets a lump sum amount + monthly pension after retirement.

2. Who Can Join NPS?

Any Indian citizen aged 18-70 (including NRIs)
Both salaried and self-employed individuals
Government employees (mandatory) vs. private sector (voluntary)

3. How Does NPS Work?

Power of Compounding in NPS – Small SIPs Grow Into Crores

NPS works in two stages:

A. Accumulation Phase (When You Invest)

You contribute regularly (monthly/annually).
Your money is invested in Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Assets (A).
You can choose between:

Active Choice (You decide where to invest)
Auto Choice (Automatically adjusts based on age)

B. Retirement Phase (When You Withdraw)

At 60 years, you must use 40% of the corpus to buy an annuity (pension plan).
You can withdraw 60% tax-free as a lump sum.
If you exit before 60, rules differ (we’ll discuss later).

4. Benefits of NPS – Why Should You Invest?

How NPS Grows Your Money Over Time (Real-Life Example)

A. Tax Benefits (Under 3 Sections!)

Section 80C: Up to ₹1.5 lakh (for Tier-I account)
Section 80CCD(1B): Extra ₹50,000 (exclusive of 80C)
Section 80CCD(2): Employer contribution up to 10% of salary (for salaried)

Example:
If you invest ₹2 lakh in NPS in a year:

₹1.5 lakh under 80C
₹50,000 under 80CCD(1B)
Total tax saving = ₹2 lakh deduction!

B. Higher Returns Than PF/PPF

NPS invests in equity + debt, giving 8-10% average returns historically.
PPF gives ~7-7.5%, while NPS can give more due to equity exposure.

C. Low Cost

Fund management charges are just 0.01%, much cheaper than mutual funds.

D. Flexible & Portable

You can increase/decrease contributions anytime.
Even if you change jobs, NPS stays with you.

5. How to Open an NPS Account?

You can open an NPS account:

Online (via eNPS portal)
Offline (through banks/post offices)

Documents Required:

PAN card
Aadhaar
Bank details
Passport-size photo

6. Withdrawal Rules – When & How Much Can You Withdraw?

NPS Withdrawal Rules – Lump Sum vs Pension Explained

Scenario	Withdrawal Rules
Normal Exit (After 60)	- 60% tax-free lump sum - 40% used to buy annuity (pension)
Early Exit (Before 60, after 5 years)	- 20% tax-free lump sum - 80% used for annuity
Premature Exit (Before 5 years)	Only 20% withdrawal allowed, rest refunded
Death of Subscriber	Full amount to nominee (tax-free)

7. NPS vs Other Retirement Plans (PPF, EPF, Mutual Funds)

NPS vs PPF vs EPF vs Mutual Funds – Best Retirement Plan Comparison

Feature	NPS	PPF	EPF	Mutual Funds
Returns	8-10%	7-7.5%	8.1%	Market-linked
Tax Benefits	80C + Extra ₹50K	80C	80C	Only ELSS under 80C
Lock-in Period	Till 60	15 years	Till retirement	3 years (ELSS)
Pension Option	Yes	No	No	No

Verdict: NPS is best for those who want tax savings + pension + higher returns.

8. Common Myths About NPS – Busted!

Common NPS Myths Debunked – Truth About Pension Returns

❌ Myth: "NPS gives low returns."
✅ Fact: NPS has given 8-10% returns historically, better than PPF/FD.

❌ Myth: "I can’t withdraw money before 60."
✅ Fact: Partial withdrawals allowed after 3 years for emergencies.

❌ Myth: "Annuity returns are low."
✅ Fact: Annuity rates vary (5-7%), but you also get a 60% tax-free lump sum.

9. Real-Life Example: How NPS Builds Wealth

Case Study:

Name: Priya (Age 30)
Monthly Investment: ₹5,000 (₹60,000/year)
NPS Return: 9% avg.
Investment Period: 30 years

At Retirement (Age 60):

Total Invested: ₹18 lakh
Estimated Corpus: ₹1.1 crore!
Withdrawal:

₹66 lakh (60% tax-free lump sum)
₹44 lakh → Annuity (~₹22,000/month pension)

Priya enjoys retirement worry-free!

10. Should You Invest in NPS? – Final Verdict

✅ Yes, if you:

Want tax savings + pension
Can invest for long-term (10+ years)
Are okay with partial lock-in till 60

❌ No, if you:

Need 100% liquidity (like mutual funds)
Already have other pension plans

11. How to Start Investing in NPS?

Decide your contribution (min ₹500/month or ₹1,000/year).
Choose fund manager (SBI, HDFC, ICICI, etc.).
Select allocation (Auto or Active).
Open account online/offline and start investing!

Conclusion: Secure Your Future with NPS

NPS is one of the best retirement plans in India, offering tax benefits, good returns, and a pension. The earlier you start, the bigger your retirement corpus grows!

Why Invest in NPS? Top 5 Benefits for Retirement Planning

What’s your take on NPS? Will you invest? Let’s discuss in the comments!

FAQs on NPS (National Pension System)

1. Can I withdraw my NPS money before retirement?

Yes, but with conditions:

Partial withdrawal (after 3 years): Up to 25% for specific needs (child’s education, medical emergency, etc.).
Early exit (after 5 years): Only 20% lump sum is tax-free; 80% must be used to buy an annuity.
Premature closure (before 5 years): Limited to 20% withdrawal.

2. Is NPS better than PPF for retirement?

NPS offers higher returns (8–10%) due to equity exposure and extra tax benefits (₹50K under 80CCD(1B)).
PPF is safer (fixed 7.1% returns) but lacks pension options.
Verdict: NPS is better for long-term wealth creation, while PPF suits risk-averse investors.

3. What happens to my NPS if I change jobs or stop working?

Your NPS account stays active even if you switch jobs or become self-employed.
You can continue contributions at your own pace (min ₹1,000/year).
No penalties for pauses, but consistent investing maximizes returns.

4. How is the NPS pension (annuity) calculated after retirement?

At retirement, 40% of your corpus buys an annuity (pension plan).
Annuity rates vary (5–7% currently), giving you a monthly income.
Example: If ₹20 lakh is used for annuity at 6%, you’ll get ₹10,000/month for life.

5. Can NRIs invest in NPS?

Yes! NRIs can open an NPS account, but:

Must use an NRE/NRO bank account.
Annuity payments will be in INR (not repatriable).

Tax benefits apply only in India (under 80C/80CCD).

The Auditor