NPS (National Pension System)

NPS answers a hard question most Indians postpone: how do you fund 25-plus years of retirement when most jobs offer no pension? It is a voluntary, portable, low-cost retirement account regulated by the PFRDA.

How it works

You open a Tier-1 account (the retirement account, with a lock-in until 60) and optionally a Tier-2 account (a flexible, no-lock-in add-on). Your money is invested by professional pension fund managers across equity, corporate bonds and government securities. You pick the asset mix yourself (Active Choice) or let it auto-adjust with age (Auto Choice). Because it is market-linked, returns are not guaranteed, but the long horizon historically rewards the equity portion.

At retirement

At 60, you can withdraw a large part of the corpus as a lump sum, while the rest must buy an annuity that pays you a regular pension for life. Recent rules also let very small corpuses be withdrawn fully. The annuity income is taxable in the year you receive it.

Tax angle in India

NPS is popular largely for its tax breaks under the old regime: deductions under Section 80CCD(1) within the 80C ceiling, plus an exclusive extra deduction under Section 80CCD(1B). Employer contributions get a separate deduction under 80CCD(2), which is also available under the new tax regime, a meaningful edge for salaried employees. The launch of NPS Vatsalya now lets parents start a retirement account for a minor child.

Worth knowing

NPS is one of the cheapest professionally managed products in India, but the mandatory annuity and the until-60 lock-in make it inflexible. It suits disciplined, long-horizon retirement saving, ideally as one pillar alongside EPF, PPF and equity mutual funds rather than your only investment. Compare annuity rates carefully at exit, since they shape your actual monthly pension.