NPS – An in-depth explanation6 min read

May 18, 2020
NPS for retirement


NPS – An in-depth explanation6 min read

What is NPS and can I invest in it?

National Pension System or NPS is an initiative launched by Government of India to provide old age income and social security coverage to all citizens. The subscription to the scheme is voluntary in nature and the benefits of the same can be availed by all the citizens of India between the ages of 18-65 years. Your contributions are invested in safe and regulated investment products that provide market linked returns over the investment horizon.

But why should I invest in NPS?

NPS not just offers you social security and retirement benefits but has loads of other features and advantages too:

Tax deduction up to INR 2 lakh every year

By investing in NPS Tier I account you can avail the deduction of INR 1.5 lakh tax deduction under Sec 80 C and over and above that an additional tax deduction of INR 50,000 under Sec 80CCD of the Income Tax (IT) Act

Low cost

Your investments under NPS incur a yearly investment management fee of mere 0.01% making it one of the lowest cost pension product

Attractive market linked returns

NPS offers you the choice to invest in multiple asset classes like equity, government bonds, corporate bonds etc. thereby ensuring you generate market linked returns at all points of time

Professionally managed

Your hard earned money is managed by experienced pension funds like LIC, SBI, HDFC etc. to name a few at a very low cost

Highly regulated

The entire NPS ecosystem is regulated by PFRDA (Pension Fund Regulatory and Development Authority) to ensure there is no wrong doing of any sort and all your grievances are redressed within proper time interval


Net asset value (NAV) i.e. the price of the unit of the fund is calculated every day and is available to you. You also have access to the portfolio of a fund which helps you in making an informed investment decision


You are free to choose your investment options and pension fund managers under NPS and switch between them as per your choice

That’s abundant. But what is this Tier I account ?

On NPS account opening, you are provided with two types of accounts:

Tier-I account

It is mandatory and investments under this account qualify for tax exemptions as mentioned above. However, this account comes with certain withdrawal conditions i.e. you cannot redeem your accumulated corpus until you reach 60 years of age. Partial withdrawals can be made subject to certain conditions. There is no upper cap on the investments you can make here, but it is better to restrict your investments as per the tax benefit you want to avail. Otherwise all your investments will get locked in until retirement. You also need to make a minimum contribution of INR 1,000 every year to avoid the account from getting frozen.

Tier-II account

It is a voluntary savings facility available to you as an add-on to the Tier-I account which implies you can have a Tier-II account only after opening a Tier-I account You are free to withdraw your savings from it at any point of time, but you won’t get any tax exemptions on these investments . It is advisable to make extra contributions over and above the tax benefit you want to avail, in Tier-II account to avoid getting caught up in liquidity restrictions.

So where will my corpus get invested under NPS?

Under NPS you get the option to invest in four asset classes as mentioned below:

Equity (E)

A ‘high risk-high return’ fund that invests predominantly in equity market instruments and is thus volatile in the short term but has good long term wealth creation potential

Government securities (G)

A ‘low risk-low return’ fund that invests purely in Government Securities

Corporate Debt (C)

A ‘medium risk-medium return’ fund that invests predominantly in fixed income bearing instruments issued by corporates

Alternative Investment Funds (A)

Under this you can invest in REITs (Real estate investment trusts), InvITs (Infrastructure investment trusts), MBS (mortgage backed securities) etc.

But how do I choose my allocation to these asset classes?

Well, NPS offers you two choices to manage your asset allocation:

Active choice

Unlike traditional investment products, NPS offers you the flexibility to design your own portfolio. So if you understand your risk profile and the asset classes well, then you can choose the percentage allocations in the four asset classes subject to a max of 75% to E up to age 50 and 5% to A. However if you are a conservative investor then you can invest your entire wealth in C or G.

Auto choice

As designing your portfolio can be a tedious process, so NPS also provides you with the option to opt for a dynamically changed and automatically allocated portfolio as per your age. Thus, the older you are, more stable and less risky your investments. As per your risk appetite you can opt for

  • Aggressive (LC-75): Maximum Equity exposure is 75% up to the age of 35
  • Moderate (LC-50): Maximum Equity exposure is 50% up to the age of 35
  • Conservative (LC-25): Maximum Equity exposure is 25% up to the age of 35

Investments under auto choice will be only in E, C or G. The equity exposure gradually reduces with age and exposure to C or G increases. Investments are auto-rebalanced every year when you opt for auto-choice.

But what if I am not happy with the performance of my funds?

Can I change my pension fund manager?

Yes, you have the option to change your pension fund manager (PFM) but only once in a financial year. Currently there are 8 PFMs registered under PFRDA, giving you ample choice to choose from. You are allowed to have different PFMs and investment options under Tier-I and Tier-II account. However, you have to stick to one PFM for the chosen investment option. You cannot have one PFM managing your E component while another managing your C or G investments.

Okay. Now I have clarity on investment in NPS.

Now, when am I eligible to withdraw my corpus?

The following withdrawal rules are applicable on subscribers of NPS:

Withdrawal after age 60 or retirement

Once you turn 60 or after retirement, you are eligible to redeem a maximum of 60% of your accumulated corpus as lump sum which is not subject to capital gains tax. The rest 40% has to be utilized for purchase of an annuity that will provide you monthly pension after your retirement.

Partial withdrawal

After completion of 3 years in NPS, you are eligible to withdraw a maximum of 25% of your contributions made to NPS for the following purposes only:

  • Higher education of his/her children,
  • Marriage of his/her children,
  • Purchase or construction of residential house or flat
  • Treatment of specified illnesses.
  • Disability of more than 75%

Only 3 partial withdrawals from NPS are allowed in the entire tenure.

Now, that I know about NPS, how do I invest in it?

NPS is the new-age option that enables you to build a retirement corpus in a tax-efficient manner. At Paytm Money, you can invest in NPS in a simple and convenient way. So what are you waiting for? Make sure you start investing in NPS right now through Paytm Money!