The National Pension System (NPS) is a savings initiative by the Indian government that encourages individuals to save for their retirement. It operates on a voluntary basis, allowing participants to contribute regularly during their working years. The contributions are invested in a mix of equity, fixed deposits, liquid funds, and government funds to generate returns.

The National Pension System (NPS) in India offers two types of accounts: Tier I and Tier II. While both serve retirement planning, they have key differences. Tier I is your primary & long-term retirement account with restrictions on withdrawals, promoting disciplined savings. On the other hand, Tier II is a more flexible, short-term savings account allowing withdrawals at any time.

More about NPS Tier I & Tier II Accounts

NPS Tier I:

The NPS Tier 1 scheme is like your main retirement savings account, and it's like a financial commitment until you turn 60. It's available for all Indian citizens, whether you work in the public or private sector, run your own business, or are an Overseas Citizen of India (OCI) or Non-Resident Indian (NRI).

1. Eligibility & Minimum Investment: NPS Tier I account is open to all Indians aged 18 to 60. To get started, you just need to invest in a minimum amount of Rs. 500. Lock in period: Funds invested into Tier I accounts are subject to a lock-in period until the investor reaches the age of 60.

2. Tax Benefits: When you put money into this account, you get some tax benefits too. The government lets you reduce your taxable income by up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act. On top of that, you can get an extra deduction of up to Rs. 50,000 under Section 80CCD (1B).

These tax advantages apply not only when you take out money early but also when you use the funds to buy annuities. But here's the catch - Taking money out before you hit 60 has some limitations with Tier I accounts.

3. Withdrawal & Exit Options: Withdrawals from the account are limited until the account holder reaches the age of 60. Once the account holder reaches this age, they can withdraw up to 60% of the fund's value. The remaining funds are then used to buy an annuity.

NPS Tier II:

Tier II NPS is like an extra option for people who already have a Tier I account in the National Pension System (NPS). Unlike Tier I you can take out your savings whenever you want without any limitations.

1. Eligibility & Minimum Investments: In order to access NPS Tier II, individuals must have an active Tier I account. Additionally, the minimum contribution required in Tier II is Rs. 1000.

2. Lock in period: Tier II accounts come with no specific lock-in periods, providing increased flexibility for both making deposits and withdrawals.

3. Tax Benefits: Contributions made to Tier II accounts are not eligible for tax exemptions.

4. Withdrawal & Exit Options: You have the freedom to make withdrawals from Tier II accounts whenever you need, following the rules and regulations in place.

However, it's a good choice if you want to invest for goals other than retirement, like buying a house or going on a vacation, or in case of any emergencies.

Understanding the tax benefits under NPS Tier I & Tier II

Employee’s Contribution:

- You can save on taxes- Under section 80CCD (1) of the Income Tax Act, you get deductions for your contributions.

• The limit is up to 10% of your salary, including Basic and DA.

• This fits within the overall cap of Rs. 1.50 lakh specified under section 80CCE.

Employer’s Contribution:

• Employers can contribute up to 10% of Basic and DA without any monetary limit. Under the new tax regime this limit is 14% of Basic and DA; 10% applies under the old regime.
• They can claim deductions under section 80CCD (2).
• This benefit is on top of the Rs. 1.50 lakh limit under section 80CCE.

Voluntary Contribution:

• You have the choice to voluntarily contribute Rs. 50,000 or more to your NPS Tier 1 account and enjoy tax deductions on these contributions under section 80CCD 1(B).

• The maximum deduction is capped at Rs. 50,000.

By remembering these details and including them in your Income Tax Return (ITR), you can enjoy significant tax savings. Just note that these benefits apply specifically to Tier 1 NPS accounts.

What should you choose?

When choosing between NPS Tier I and Tier II, think about your money goals. NPS Tier I is mainly for saving for retirement, but it has rules like a waiting time and a minimum yearly deposit. It's best if you are looking for long-term savings.

NPS Tier II is more flexible. You can take out your money whenever you want, but it doesn't have the same tax benefits as Tier 1. If you need an investment for short-term goals or emergencies, Tier II is your go to option. The decision between Tier I and Tier II depends on what you want to achieve, how much risk you can handle, and how much control you want over your investments, but opting for a combination of both the account types, strikes a balance between long-term financial security and short-term flexibility in your investment portfolio.

Claiming Tax Benefits

1. Basic Deduction: If you have an NPS Tier I account, you can get a tax deduction of up to ₹1.5 lakhs.

2. Additional Deduction: On top of the basic deduction, Tier I investors can get an extra deduction of up to ₹50,000 under Section 80CCD (1B).

3. Partial Withdrawals: When you make partial withdrawals, 25% of the withdrawn amount is tax-free. You can do this three times in your entire lifetime with your NPS PRAN.

4. Tax-Free Annuity Investments: If you choose to invest in an annuity, the money you invest remains tax-free. However, the income generated from the annuity is taxable at the applicable rates.

5. Lump Sum Withdrawals After 70: After the age of 70, if you withdraw a lump sum, up to 60% of the amount can be tax-exempt. The mandatory 40% is used to buy an annuity, and the returns from this annuity are taxable.

Update — NPS exit rules changed in December 2025. The 60% / 40% split described above was the rule up to that point. It is left here on purpose, because a lot of older paperwork and third-party calculators still quote it. Under the PFRDA (Exits and Withdrawals under NPS) Amendment Regulations notified on 16 December 2025, a non-government subscriber (All Citizen and Corporate NPS) taking normal exit can now withdraw up to 80% as a lump sum, with a minimum 20% annuity. By corpus: up to ₹8 lakh — the entire amount can be withdrawn; above ₹8 lakh and up to ₹12 lakh — up to ₹6 lakh as lump sum, with the balance going into an annuity or a Systematic Unit Redemption spread over at least six years; above ₹12 lakh — up to 80% lump sum with a minimum 20% annuity. For premature exit there is no longer any minimum subscription period, and a corpus up to ₹5 lakh can be taken in full. One caution on tax, because it is a separate question from the withdrawal limit: Section 10(12A) exempts 60% of the corpus, and whether the extra 20% of lump sum is tax-free has not been settled — do not plan around it without checking. (Source: PFRDA FAQs on Exits and Withdrawals from NPS, All Citizen Model, updated March 2026.)

6. Tax Benefits for Employers: Employers can contribute up to 10% of an employee's Basic + D.A. to their NPS account under Section 80CCD(2). Under the new tax regime that limit is 14% of Basic + D.A.; 10% applies under the old regime. The total cap for contributions to NPS, PF, and Superannuation by the employer is ₹7,50,000.

Opening NPS Account with PensionBox

Investing in NPS with PensionBox is the fastest, paperless and hassle-free process that only takes 3 minutes of your time. Who would have thought that securing your future could be so effortless? Additionally, we are proudly partnered with ICICI Prudential Fund Manager and regulated by the Pension Fund Regulatory and Development Authority (PFRDA) of India.

You can swiftly initiate opening your NPS Account by signing up with us, completing a few simple steps.