The National Pension System (NPS) — also called National Pension Scheme — is a market-linked retirement account regulated by PFRDA. You contribute monthly, money is invested in equity, corporate bonds and government securities, and at 60 you take part as lump sum and part as annuity (pension). It is voluntary for most private-sector employees; government hires after 2004 are enrolled by default.
What is NPS in salary?
HR may offer NPS deduction from salary: typically up to 10% of basic + DA from you, with optional employer match. Your contribution can qualify for tax benefits; employer contribution has separate limits under the old regime. Check your payslip for ‘NPS Tier I’ — not every company offers it.
The tax angle (old regime)
Under the old regime, NPS gives an extra ₹50,000 deduction under Section 80CCD(1B) on top of the ₹1.5 lakh 80C limit — a genuine bonus PPF does not offer. Employee contribution also counts within 80CCD(1) toward the overall 80C cap. Employer NPS contributions can be tax-efficient up to notified limits. On the new regime, these deductions do not apply — you get lower slabs instead.
How NPS works at maturity (age 60)
- Up to 60% of corpus can be withdrawn as lump sum (tax-free within limits).
- At least 40% must buy an annuity that pays a monthly pension — taxed as income.
- Partial withdrawal allowed for specific goals after 3 years (limits apply).
- Tier II is optional and more liquid — no extra 80CCD(1B) benefit on Tier II.
The annuity catch
At 60, the annuity pension is taxable every year. PPF gives you the whole corpus tax-free — NPS trades that certainty for higher growth potential in equity during accumulation. For a 25-year-old, that trade-off only makes sense after EPF, emergency fund, and equity SIP are in place.
NPS vs PPF vs EPF
- EPF: mandatory for salaried, safe, tax-free — keep it; never withdraw on job switch.
- PPF: voluntary, guaranteed, fully tax-free, 15-year lock-in — great second pillar.
- NPS: voluntary, market-linked, extra ₹50k tax break, annuity at exit — third pillar for old-regime optimisers.
The takeaway
Gen Z playbook: emergency fund → EPF (automatic) → start SIP → PPF if you want guaranteed → NPS only for the extra ₹50k old-regime deduction, not as your only retirement bet.