NPS — National Pension System Complete Guide
NPS Tier 1 vs Tier 2, ₹50K extra deduction under 80CCD(1B), asset allocation, and NPS vs PPF vs ELSS.
NPS Complete Guide: Tier 1 vs Tier 2
Your employer deducts 10% of your basic salary for NPS every month. But do you actually know where that money goes — and how to make it work harder? Let's break down the National Pension System from scratch.
What is NPS?
NPS has two account types. Tier 1 is your primary retirement account with a lock-in until 60. Tier 2 is a voluntary savings account with no lock-in — think of it as a flexible mutual fund.
Tier 1 vs Tier 2: Key Differences
| Feature | Tier 1 | Tier 2 |
|---|---|---|
| Lock-in | Until age 60 | No lock-in |
| Min. Opening | ₹500 | ₹1,000 |
| Min. Annual | ₹1,000/year | No minimum |
| Tax Benefit 80C | Yes (₹1.5L) | No |
| Extra 80CCD(1B) | Yes (₹50K) | No |
| Withdrawal | Partial after 3 yrs | Anytime |
Asset Allocation: E, C, G, and A
NPS invests in four asset classes:
- E (Equity) — Up to 75% allowed (cap reduces after age 50)
- C (Corporate Bonds) — Medium risk, steady returns
- G (Government Securities) — Safest, lowest returns
- A (Alternative Assets) — REITs, InvITs, CMBS (max 5%)
You pick either Active Choice (you decide the split) or Auto Choice (lifecycle fund that shifts from equity to bonds as you age).
What Happens at 60?
At maturity, you must use at least 40% of your corpus to buy an annuity (monthly pension). The remaining 60% can be withdrawn tax-free.
Partial Withdrawal Rules
After 3 years in Tier 1, you can withdraw up to 25% of your own contributions for specific reasons:
- Children's higher education or marriage
- Treatment of critical illness
- Purchase or construction of a house
- Starting a business
You can make a maximum of 3 partial withdrawals during the entire NPS tenure.
NPS vs PPF vs ELSS
| Feature | NPS | PPF | ELSS |
|---|---|---|---|
| Lock-in | Until 60 | 15 years | 3 years |
| Returns (approx) | 9-12% | 7.1% | 12-15% |
| Tax on Returns | Partial (60% exempt) | Fully exempt | 10% LTCG above ₹1L |
| Risk Level | Medium | Zero | High |
| Extra ₹50K deduction | Yes | No | No |
How to Open an NPS Account
- Visit enps.nsdl.com and register with Aadhaar + PAN
- Choose your Pension Fund Manager (SBI, HDFC, etc.)
- Select Active or Auto choice and set your asset allocation
- Start with as little as ₹500
Key Takeaways
- NPS Tier 1 gives up to ₹2 lakh tax deduction (₹1.5L under 80C + ₹50K under 80CCD(1B))
- Choose Active Choice with higher equity if you're under 40
- 60% of your corpus is tax-free at withdrawal; 40% must buy an annuity
- NPS suits long-term retirement planning — not short-term goals
How much extra tax deduction does NPS Tier 1 offer under Section 80CCD(1B)?
Try the NPS Calculator to estimate your retirement corpus, or compare with the PPF Calculator.
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