With a 23% expansion in Asset Under Management, the combined AUM of the National Pension System and Atal Pension Yojna reached ₹14.43 lakh crore by March 2025. Subscriber numbers have grown consistently across different investor types, like government employees, private sector professionals, and self-employed individuals. This broadening participation reflects a growing priority of retirement savings.
Despite this momentum, some investors might lack a nuanced perspective on how to invest in NPS. Many are either unaware of the process or uncertain about where to begin. This blog is a retirement planning guide that decodes how to invest in NPS to help investors begin their retirement savings journey.
What is NPS and How It Works
Administered by the Pension Fund Regulatory and Development Authority (PFRDA) and backed by the Indian Government, the National Pension System is a voluntary, long-term medium for retirement savings. It opened to all Indian residents in 2009 after being introduced for central government employees in 2004. The scheme has the following key participants.
| Organisation | Role |
| PFRDA | Regulator |
| Point of Presence (PoP) entities, such as banks and financial institutions | Intermediaries that onboard investors and direct investments |
| Central Recordkeeping Agency | CRA like Protean, CAMS NPS, and KFintech that maintain records |
NPS operates on a defined contribution model, meaning the subscriber’s retirement corpus is determined by the amount contributed and the returns generated over the investment period, unlike a defined benefit plan, where the payout is fixed. Like mutual funds, investors invest a particular amount periodically, and the pool created is invested in a mix of debt, equity, and other assets to generate capital gains. The investment is managed and made on behalf of investors by the regulated pension fund managers.
The allocation across assets is determined either by the subscriber’s active choice or through an auto-choice lifecycle fund that adjusts the equity-debt mix based on the subscriber’s age. An annuity, which offers a steady income, must be purchased using a portion of the accumulated corpus upon retirement; the remaining funds may be taken out as a lump payment. Furthermore, NPS investment can be made through two accounts; understanding them is important to decode the pension investment meaning.
Types of NPS Accounts
Before understanding how to invest in NPS, it is important to explore the features and characteristics of the two accounts that investors have to make with NPS for undertaking investments.
Tier 1 NPS Account
The Tier 1 account is the primary NPS account that investors must have to make NPS investments. It is a pension account with restrictions on withdrawals, ensuring that funds remain invested until retirement. The table below explains its key characteristics.
| Parameter | Meaning |
| Type | individual pension account |
| Withdrawals | Restricted withdrawals permitted according to the Exit & Withdrawal rules and regulations |
| Minimum Amount to Open | ₹500 |
| Minimum Contribution | ₹1,000 |
Tier 2 NPS Account
The Tier 2 account is a voluntary savings account that can be opened by NPS investors who already have a Tier 1 NPS account. Unlike Tier 1, there are no restrictions, and the subscribers can withdraw funds at any time. The account operates more like a liquid investment account because of its flexibility. However, Tier 2 does not offer the same tax benefits as Tier 1 for most subscribers. Furthermore, a Tier 2 account can be converted into a Tier 1 account anytime. Discussed below are the key features that define NPS Tier 2 accounts.
| Parameter | Meaning |
| Type | An optional account that can be opened only if an investor has an active Tier 1 account |
| Withdrawals | Unrestricted withdrawals |
| Minimum Amount to Open | ₹250 |
| Minimum Contribution | No restriction |
While Tier 1 account priorities long-term, consistent build-up of retirement corpus and tax efficiency, the distinguishing feature of Tier 2 accounts is their liquidity. With this understanding of NPS, let us explore how to invest in NPS.
Step-by-Step Process to Invest in NPS
Investors who meet specific investment criteria and have optimal documents can invest in NPS. This section decodes each of these three aspects to holistically explain how to invest in NPS.
Eligibility Criteria for NPS
Before understanding how to invest in NPS, it is important to determine if the investor is eligible or not. The following conditions apply.
- The applicant must be an Indian citizen.
- At the time of account establishment, the applicant must be between the ages of 18 and 85.
- The Know Your Customer (KYC) guidelines must be followed by the applicant. Investors need to submit relevant documents during the KYC process for investments.
- NPS accounts cannot be opened by Hindu Undivided Families (HUFs) or Persons of Indian Origin (PIOs).
- Since only citizenship is the main criterion, non-residents and Overseas Citizens of India (OCI) can also apply.
Documents Required
The documents required for NPS account opening are listed below.
| Category | Documents Requires |
| Investor using the Aadhaar e-KYC | Aadhaar e-KYC Zip file, which can be downloaded from the UIDAI portalPAN CardCancelled ChequeSignaturePhotograph |
| Investor without Aadhaar e-KYC | Address proof like a bank passbook, water bill not over 2 months old, driving licence, rent receipt, etc.Proof of Date of Birth, like birth certificate, Aadhaar card, Passport, PAN, etc. |
How to Open an NPS Account Online
From the NPS website, investors need to select one of the three CRAs through which they want to create an NPS account. The steps below are the investment account guide to invest in NPS through the official eNPS portal.
Step 1: Visit the official eNPS portal.
Step 2: Investors should choose the new registration option and select whether they want to open a Tier 1 or Tier 2 account. If it is a new investor, they need a Tier 1 account initially.
Step 3: Enter the PAN, Aadhaar, and bank details for verification.
Step 4: Then the investor chooses the fund manager they want. These pension fund managers are usually banks and financial institutions.
Step 5: Then the investor needs to select whether they want auto or active allocation.
Step 6: Then the investor needs to attach scanned copies of their documents and signature.
Step 7: After that, investors input the desired deposit amount and complete the transaction.
Step 8: The registration is complete, the investor receives a Permanent Retirement Account Number (PRAN), a unique number that identifies their account in the NPS system, and the password has to be set.
Investors can also visit other CRA websites, like KFintech and CAMS NPS, to start investing. The process is almost similar, as the regulator requirements are streamlined in these government-backed schemes. Furthermore, an investor can visit their nearest Point of Presence, which are banks and financial institutions, like SBI, India Post, etc., to create an NPS account offline.
However, before undertaking these steps, investors must understand the nuances, like how the asset allocation mechanism of NPS works.
NPS Asset Allocation Options
NPS subscribers or investors have two broad choices when it comes to how their NPS contributions are invested.
- Active Choice: Under this option, the subscriber decides how to distribute their contributions across four asset classes, namely Equity (E), Government Securities (G), Corporate Bonds (C), and Alternative Investment Funds (A). This option suits investors who have knowledge of financial markets and wish to make informed allocation decisions. The table below highlights the permissible asset allocation strategy that investors must follow.
| Asset class | Limit |
| E | Maximum 75% |
| C | Maximum 100% |
| G | Maximum 100% |
| A | Maximum 5% (Only in Tier 1 accounts can investors invest in A) |
- Auto Choice (Lifecycle Fund): This is the default option for subscribers who prefer not to manage their asset allocation actively. NPS offers three lifecycle fund variants under auto choice, namely Aggressive (LC75), Moderate (LC50), and Conservative (LC25), based on their maximum equity exposure. The equity allocation under each variant automatically decreases as the subscriber ages, transitioning progressively to bonds and government securities to reduce risk closer to retirement.
The impact of returns on NPS is further optimised by the tax benefits the investment medium has.
NPS Tax Benefits
In India, NPS is among the key tax-saving investment options. Before 2019, NPS investments in India were classified as Exempt Exempt Tax (EET). This is due to the fact that maturity proceeds were completely taxed even if the investments and returns were excluded. Nonetheless, the Union Budget 2019 permitted maturity exemptions, which led to the creation of NPS Tier-I accounts as an EEE investment. Discussed here are the provisions that offer tax benefits to NPS.
| Section 80CCD(1) | Contributions to Tier 1 NPS are deductible up to 20% of gross income for self-employed people or 10% of pay (basic + DA) for salaried people. However, Section 80C permits a deduction of up to ₹1.5 lakh. |
| Section 80CCD(1B) | Beyond the aforementioned ₹1.5 lakh cap, NPS contributions are eligible for an additional deduction of up to ₹50,000. This brings the total deduction to ₹2 lakh per year |
| Section 80CCD(2) | Employer contributions to NPS up to 10% of salary (14% for government employees) are also deductible |
| Maturity Proceeds | Withdrawals up to 60% of the corpus at retirement are fully exempt from tax. |
Furthermore, like any investment, there are certain risks that investors must consider along with returns.
NPS Returns and Risk Factors
The retirement investment returns of NPS are market-linked and vary with market conditions, scheme type, its allocation strategy, pension fund manager, etc., just like mutual funds. For instance, in 3 years, the returns of the Scheme E Tier 1 NPS account by pension fund manager TATA is 15.97%, while that of Axis is 12.91%. The benchmark performance here was 13.40%, and while TATA performed better than the benchmark, Axis underperformed, as of 8 April 2026.
Despite past performances, the following risk factors must be considered.
- Market risk: The equity component of NPS is subject to market volatility. Subscribers or investors with a higher equity allocation face greater short-term fluctuations.
- Interest rate risk: Government securities and corporate bonds in the NPS portfolio are sensitive to changes in interest rates. If new bonds enter the market with high interest rates, the market value of existing bonds will fall, as the new bonds become more financially viable.
- Annuity risk: The current annuity rates at the time of purchase determine the annuity income upon retirement. If annuity rates are low at the time of retirement, the periodic income may be lower than anticipated.
- Liquidity risk: The Tier 1 account of NPS has restricted liquidity until age 60, with limited provisions for partial withdrawal. Investors who may need funds in the medium term should account for this constraint.
Such risks can be controlled if investors analyse their own profile, that is, their goals, risk appetite, and so on, to determine that NPS aligns with them.
Who Should Invest in NPS
While NPS is a versatile asset class, some investor categories can find greater affinity towards NPS. Identified here are such groups.
- Salaried professionals in the private sector: Employees who do not have access to a defined pension plan can use NPS to build a structured retirement corpus while benefiting from the employer contributions.
- Self-employed individuals: Entrepreneurs, freelancers, and professionals such as doctors and lawyers can leverage the 20% gross income deduction under Section 80CCD(1) alongside the additional ₹50,000 benefit under Section 80CCD(1B).
- Young earners beginning their career: Starting NPS contributions early amplifies the compounding effect significantly. A subscriber who starts contributing at 25 with ₹5,000 per month would accumulate a substantially larger corpus by 60 than someone starting at 35 with the same contributions, purely due to the additional decade of compounding.
On the other hand, investors who require liquidity in the near term, or who are averse to market-linked products altogether, may find NPS restrictive due to its lock-in structure and variable returns.
FAQ‘s
Any Indian citizen between 18 and 85 years of age, including NRIs and OCIs, can invest in NPS. The subscriber must comply with KYC requirements. HUFs and Persons of Indian Origin, who are not citizens, are not eligible. Both salaried employees and self-employed individuals can open an NPS account through a registered PoP or the eNPS portal.
Both NPS and the Provident Fund offer tax benefits and are suited for long-term retirement savings. NPS provides a higher potential for market-linked returns through equity exposure but comes with market risk. PF offers assured, fixed returns with lower risk. The better option depends on an investor’s risk appetite, tax situation, and retirement goals.
Investors need at least ₹500 to open an NPS Tier 1 account, and the minimum contribution is set at ₹1,000. The Tier 2 accounts can be opened with ₹250, and there are no restrictions on contributions. However, it is important to note that investors must have an NPS Tier 1 account to create an NPS Tier 2 account.
A full premature exit before the age of 60 can be done, but with restrictions. If the accumulated pension wealth is less than or equal to ₹5 lakhs, the entire amount can be withdrawn in a lump sum or periodically. If the wealth is greater than ₹5 lakhs, at least 80% should be utilised to purchase an annuity.
The returns of NPS are market-linked and vary with market conditions, so they are not fixed, unlike many government schemes. The return rate also varies with the scheme, the pension fund manager, allocation style, and so on, just like mutual funds. Investors can check the performance of their particular scheme through the NPS website.
