NPS Guide 2025: Returns, Tax Benefits (80CCD) & Withdrawal Rules
Understanding the National Pension System (NPS) is crucial for maximizing retirement savings. With returns averaging 10-12% and an exclusive ₹50,000 tax deduction (Section 80CCD 1B), NPS is a powerful tool.
However, nuances like Tier 1 vs Tier 2, mandatory annuity, and Lifecycle Funds can be confusing. This guide simplifies NPS rules, tax benefits, and withdrawal norms for 2025.
What is NPS (National Pension System)?
NPS is a voluntary, market-linked retirement savings scheme regulated by the PFRDA. It is designed to provide a retirement corpus and a monthly pension.
Tier 1 vs Tier 2: The Difference
NPS offers two types of accounts. Tier 1 is mandatory for pension; Tier 2 is optional.
| Feature | Tier 1 (Pension) | Tier 2 (Investment) |
|---|---|---|
| Status | Mandatory | Optional |
| Lock-In | Until Age 60 | No Lock-In (Liquid) |
| Tax Benefit | ✅ Yes (80C + 80CCD 1B) | ❌ No |
| Withdrawal | Restricted | Anytime |
Investment Choices
- E (Equity): Stocks (High Risk, High Return). Max 75%.
- C (Corporate Bonds): Fixed Income (Moderate Risk).
- G (Govt Securities): G-Secs (Low Risk).
- A (Alternative): REITs/InvITs (Max 5%).
You decide the percentage allocation yourself.
E.g., 50% Equity, 30% Corporate Bonds, 20% G-Secs.
System automatically reduces equity as you age.
- LC75 (Aggressive)
- LC50 (Moderate)
- LC25 (Conservative)
Tax Benefits: The ₹50,000 Bonus
NPS is the only scheme that offers tax deductions above the ₹1.5 Lakh limit of Section 80C.
Corporate Employees: Employer contribution (up to 10% of Basic+DA) is tax-free over and above the ₹2 Lakh limit under Sec 80CCD(2).
Withdrawal Rules (Maturity)
At age 60, your corpus is divided into two parts:
You can withdraw 60% of corpus.
Must buy annuity for monthly pension.
- Allowed only after 10 years.
- Must use 80% of corpus for annuity.
- Only 20% withdrawable as lump sum.
NPS vs PPF vs EPF
| Feature | NPS | PPF | EPF |
|---|---|---|---|
| Returns | 10-12% (Market) | 7.1% (Fixed) | 8.25% (Fixed) |
| Lock-In | Age 60 | 15 Years | Retirement |
| Tax Benefit | ₹2 Lakh | ₹1.5 Lakh | ₹1.5 Lakh |
| Maturity Tax | 60% Tax-Free | 100% Tax-Free | 100% Tax-Free |
Frequently Asked Questions (FAQs)
Final Verdict
NPS is the best tool for retirement if you want equity exposure with tax benefits.
Fincado Research Team
Fact CheckedOur analysis is built on deep-dive research into RBI Benchmarks and lender-specific disclosures. We verify every interest rate and fee structure against real-world borrower approvals to ensure the highest level of accuracy for Indian home buyers.
Disclaimer: NPS returns are market-linked and not guaranteed. Tax laws are subject to change. This guide is for educational purposes. Please consult a financial advisor before investing.