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NPS vs other tax saving instruments

The National Pension System (NPS) is a voluntary investment-cum-pension scheme run by the Indian government. It is available for any Indian citizen in the 18-70 age bracket. You can open an NPS account, with a minimum monthly contribution of Rs. 500 (Rs. 6,000 annually). There is no upper limit for NPS contribution.

NPS types

There are two types of NPSs:  

  • NPS Tier 1 (mandatory for anyone who opts for the NPS. You can opt for an additional Tier 2 account if you like)
  • NPS Tier 2

Tier 1 NPS is a retirement planning account that cannot be withdrawn until retirement, while Tier II is a voluntary savings account.

Please see below, significant NPS tax benefits –

Parameters Tier 1 Tier 2
Tax benefits Up to Rs. 2 lakh p.a. (u/s 80C and 80CCD) Up to Rs. 1.5 lakh for government employees (u/s 80C)

No benefit for other employees

Additional tax benefits Up to Rs. 50,000 u/s 80CCD(1B) No benefits
Min./max. contribution Rs. 500 p.a./no upper limit Rs. 250/no upper limit
Withdrawal option Not permitted; locked-in until you reach 60 years of age. Permitted any time except for government employees who have a 3-year lock-in period to avail tax benefits.
Corpus available on retirement 60% of the corpus in lumpsum; 40% invested to be invested in an annuity scheme if the corpus is more than Rs. 5 lakh. NA

NPS vs other tax-saving instruments

National Pension System benefits compare well to other tax-saving instruments:

Instrument Interest earned Lock-in period
NPS Historically between 8% and 10% Up to retirement age
Equity-linked savings schemes (ELSS) Historically between 12% and 15% 3 years
Public Provident Fund (PPF) 7.1% (changes as per latest government regulation) 15 years
Fixed Deposits (FDs) Usually between 6 and 9% (differs from entity to entity) 5 years


How NPS compares against ELSS and PPF

Equity exposure is capped at 50%; once you reach 50 years, equity exposure is reduced by 2.5% each year, balancing the risk-return ratio over the long term. Completely invests in debt instruments; lowest risk, hence steady but lower returns than the NPS. By definition, ELSS has maximum exposure to equities and therefore maximum market exposure and risk

NPS calculator

NPS calculators ask you basic details like your current age, your retirement age, the percentage of NPS corpus you want to invest in a pension scheme, etc., and provide you with the results. The National Pension System Trust has a simple calculator that gives you the exact pension amount based on the numbers you enter into the calculator.


If you are more conservative about your investments or want to focus on retirement planning, NPS benefits are viable and attractive in terms of risk-return. As with all investment instruments, you are best served if you start now. The longer you have to fund your retirement, the greater benefits you will reap in those golden years. In case of any doubts, you could always reach out to a financial expert to help with your retirement planning.

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