How to Invest in NPS? Complete Guide to National Pension System

The National Pension System (NPS) is a long-term, market-linked retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows individuals to regularly invest towards retirement while choosing how their money is allocated between equity, corporate bonds and government securities.

NPS is not limited to salaried employees. Indian citizens, including eligible non-residents and Overseas Citizens of India (OCIs), can voluntarily open an NPS account under the All Citizen Model, subject to the prescribed eligibility requirements.

This guide explains who can invest in NPS, how to open an account, how to select an investment option, how to contribute and the tax rules applicable from 1 April 2026.

What is NPS?

NPS is a defined-contribution retirement system. Money contributed by a subscriber is invested by PFRDA-registered Pension Funds in permitted asset classes.

The eventual retirement corpus depends on:

• Amount contributed
• Duration of investment
• Investment performance
• Asset allocation selected by the subscriber

Unlike a traditional guaranteed pension plan, NPS returns are market-linked and are not guaranteed.

PFRDA regulates the NPS architecture, Pension Funds, Points of Presence and other intermediaries involved in operating the system.

Who Can Invest in NPS?

Under the All Citizen Model, an eligible individual can voluntarily join NPS.

PFRDA currently permits voluntary NPS subscription between the ages of 18 and 85 years.

For minors, the Government operates a separate NPS Vatsalya framework under which a parent or guardian can contribute to an NPS account for the minor.

NPS Tier I vs Tier II Account

NPS provides two types of accounts: Tier I and Tier II.

Tier I is the main retirement account and is normally the appropriate account for investors using NPS for long-term retirement planning.

Tier II is an optional investment account available to subscribers having an active Tier I account. It provides significantly greater withdrawal flexibility.

A limited tax concession can apply to specified Tier II contributions made by Central Government employees where the prescribed three-year lock-in conditions are satisfied under the income-tax law.

How to Open and Invest in NPS

An NPS account can be opened online through the eNPS platform of NPS Trust or through a PFRDA-registered Point of Presence (PoP).

Step 1: Choose How You Want to Open the Account

You can register online through eNPS or approach a registered Point of Presence.

Step 2: Complete Your KYC

Provide the required identity, address and other KYC information. Resident individuals are generally required to provide their photograph, PAN and proof of address. Additional documentation may apply to NRIs and OCIs.

Step 3: Provide Personal and Bank Details

Enter your contact information, bank account details and other information required during registration.

Step 4: Add a Nominee

Nomination should be completed carefully because the nominee or legal heirs may become entitled to the accumulated pension wealth in the event of the subscriber's death.

Step 5: Choose Your Pension Fund

NPS subscribers can select a Pension Fund registered with PFRDA. Under the Common Scheme framework, the Pension Fund can generally be changed once in a year.

Step 6: Select Your Investment Strategy

Choose between Active Choice and Auto Choice, or consider an eligible scheme under the newer Multiple Scheme Framework where applicable.

Step 7: Make the Initial Contribution

Complete the initial contribution through the available payment facility.

Step 8: Receive Your PRAN

After successful registration, the subscriber receives a Permanent Retirement Account Number (PRAN).

PRAN is the key identification number for the subscriber's NPS account.

Step 9: Continue Investing

Future contributions can be made through the CRA platform, eNPS, NPS mobile facilities, participating PoPs or other permitted modes such as D-Remit.

How is Your NPS Money Invested?

Under the Common Scheme framework, NPS primarily provides two approaches:

• Active Choice
• Auto Choice

What is Active Choice in NPS?

Under Active Choice, the subscriber decides how the contribution will be distributed across permitted asset classes.

The total allocation cannot exceed 100%.

PFRDA also permits Alternative Investment exposure in applicable structures subject to the prescribed limits.

Active Choice may be suitable for investors who understand asset allocation and want greater control over their equity and debt exposure.

What is Auto Choice in NPS?

Auto Choice is intended for subscribers who do not want to actively decide their asset allocation.

The portfolio follows a life-cycle approach, meaning the equity exposure is automatically adjusted as the subscriber grows older.

The precise allocation between equity, corporate bonds and government securities changes according to the applicable life-cycle matrix.

What is the Multiple Scheme Framework in NPS?

NPS has undergone an important change with the introduction of the Multiple Scheme Framework (MSF) for non-government subscribers.

From 1 October 2025, eligible non-government NPS subscribers can invest across schemes offered by Pension Funds within the MSF framework.

These schemes can have different risk profiles and may cater to categories such as:

• Professionals
• Self-employed persons
• Gig workers
• Corporate employees

Certain MSF schemes can have substantially higher equity exposure than traditional Common Scheme NPS allocations.

Investors should therefore understand the particular scheme's risk classification and investment policy before investing.

MSF should not automatically be treated as equivalent to the traditional Active Choice framework.

How Can You Contribute to NPS?

There is no general upper limit on how much a subscriber may contribute to a Tier I or Tier II account, although the amount qualifying for an income-tax deduction is separately restricted under tax law.

Contributions can currently be made through:

• Physical Points of Presence
• Online CRA facilities
• eNPS
• NPS mobile application
• D-Remit facilities

D-Remit can use a virtual account linked to the subscriber's PRAN.

The amount invested is allocated according to the Pension Fund and investment choice recorded with the CRA.

Can You Change Your NPS Investment Choice?

Yes.

Under the current All Citizen framework, PFRDA permits the asset allocation or investment choice to be changed up to four times in a year.

The Pension Fund can generally be changed once during a year.

This allows subscribers to review their retirement portfolio periodically without opening a fresh NPS account.

Frequent switching, however, should not substitute for a properly considered long-term retirement strategy.

Tax Benefits on NPS from 1 April 2026

The tax law changed structurally from 1 April 2026, when the Income-tax Act, 2025 came into force.

Income relating to the period 1 April 2025 to 31 March 2026 continues to be governed by the Income-tax Act, 1961 and is reported for Assessment Year 2026-27.

Income and deductions for Tax Year 2026-27, beginning 1 April 2026, are governed by the Income-tax Act, 2025.

NPS Deduction: Income-tax Act, 1961 vs Income-tax Act, 2025

Tax Deduction for Your Own NPS Contribution

Under the regular tax regime, an individual's qualifying NPS contribution can form part of the ₹1,50,000 overall deduction available under Section 123, subject to the prescribed conditions in Schedule XV.

For an employee, the prescribed contribution-based limit is generally linked to 10% of salary, while for other individuals it is linked to 20% of gross total income, subject to the applicable statutory ceiling.

In addition, Section 124(3) of the Income-tax Act, 2025 provides a separate deduction of up to ₹50,000 for qualifying contributions to the notified pension scheme.

An amount already claimed under Section 123 cannot again be claimed under Section 124(3).

Accordingly, an eligible taxpayer under the regular tax regime may potentially receive NPS-related deductions forming part of the ₹1.5 lakh general investment deduction together with the additional ₹50,000 deduction, subject to all applicable conditions.

NPS Deduction Under the New Tax Regime

This distinction is important.

Under Section 202 of the Income-tax Act, 2025, most Chapter VIII deductions are not available under the default new tax regime.

Section 202 preserves the employer-contribution deductions under Sections 124(1) and 124(2), but not the individual's own additional contribution deduction under Section 124(3).

Therefore, an individual should not invest in NPS solely on the assumption that a ₹50,000 personal contribution will automatically reduce taxable income under the new tax regime.

Employer Contribution to NPS

Section 124 provides a separate deduction for qualifying employer contributions.

For this purpose, the statutory definition of salary includes Dearness Allowance where the terms of employment so provide and excludes other allowances and perquisites.

Employer NPS contribution can therefore remain particularly relevant for salaried taxpayers using the new tax regime.

What Happens When You Withdraw From NPS?

NPS should primarily be treated as a retirement investment because withdrawals and exits are regulated.

PFRDA's current All Citizen Model incorporates changes to the NPS exit framework.

For a normal exit, the vesting period is generally 15 years of subscription or attaining age 60, whichever occurs earlier, subject to the applicable scheme conditions.

Under the current regulatory framework, an eligible subscriber may generally take up to 80% as a lump sum and use at least 20% for annuity in an eligible normal exit.

Special withdrawal alternatives apply to smaller NPS corpuses.

Important: 80% NPS Withdrawal Does Not Mean 80% is Tax-Free

PFRDA's current All Citizen rules may permit a normal-exit lump sum of up to 80% of the corpus.

However, under the Income-tax Act, 2025, the exemption for payment from the NPS Trust on closure or opting out remains limited to 60% of the total amount payable.

Investors should therefore not assume that the entire 80% lump-sum amount permitted under PFRDA regulations is automatically tax-free.

If a subscriber proposes to withdraw more than 60% of the corpus, the income-tax consequences should be separately evaluated.

Is NPS Pension Taxable?

Yes.

Where part of the NPS corpus is used to purchase an annuity, the amount used for purchasing the annuity is not treated as received by the subscriber at that stage under the applicable NPS tax provisions.

However, pension or annuity income subsequently received is taxable in the hands of the recipient according to the applicable income-tax provisions.

Common Mistakes While Investing in NPS

• Treating NPS only as a year-end tax-saving investment.
• Assuming NPS provides guaranteed returns.
• Selecting high equity exposure without considering risk tolerance.
• Opening another PRAN unnecessarily after changing employment.
• Ignoring or failing to update nomination details.
• Assuming Tier II provides the same tax benefits as Tier I.
• Assuming the entire amount permitted to be withdrawn under PFRDA rules is automatically tax-exempt.
• Ignoring the difference between NPS investment rules and income-tax rules.

Is NPS a Good Investment?

NPS can be useful for investors looking for a structured, long-term retirement portfolio with regulated fund management, flexible asset allocation and potential tax benefits.

Its suitability depends on factors such as:

• Investor's age
• Retirement horizon
• Risk tolerance
• Existing EPF and other retirement savings
• Applicable tax regime
• Requirement for liquidity
• Willingness to use part of the retirement corpus for an annuity

An investor should therefore select NPS because it fits the person's retirement strategy and not merely because a tax deduction may be available.

Conclusion

Investing in NPS has become relatively straightforward. An eligible individual can open an account online or through a registered Point of Presence, obtain a PRAN, select a Pension Fund and choose between Active Choice, Auto Choice or other eligible NPS schemes.

The most important decision is not simply how much to contribute. Investors should also decide how much equity and debt exposure is appropriate, whether Active or Auto Choice is suitable, and how NPS fits with their broader retirement portfolio.

From 1 April 2026, NPS tax deductions are governed by the Income-tax Act, 2025 for Tax Year 2026-27 onwards.

Personal NPS deductions generally remain relevant under the regular tax regime, while qualifying employer NPS contributions continue to receive favourable treatment even under the new tax regime.

Subscribers should also distinguish between PFRDA's withdrawal rules and the separate income-tax provisions governing whether those withdrawals are exempt.

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