By Ashish Malaviya · First published 2/11/2026

NPS Basics for Salaried Beginners

An introduction to India’s National Pension System, including Tier I and Tier II, contributions, investment choices, tax treatment and exit rules to verify.

The National Pension System (NPS) is a regulated pension saving scheme. Eligible NPS subscribers can fund a pension account and invest according to the rules in the appropriate model. The value may vary based on the investment options selected within the scheme. However, this scheme isn’t a deposit and pension doesn’t mean guaranteed returns.

As a salaried individual starting out with this scheme you’ll want to understand how your account works, what model you’re on and what limitations there are on funding and withdrawing. Retirement products can be quite complex to understand and it’s easy to get caught up with the tax benefit or balance. Other factors to consider include how easily the funds can be accessed, the risk involved with investing, fees, exit requirements, and what happens with the pension income.

Tier I and Tier II

Tier I accounts are the main retirement account and will have some limitations around withdrawing funds. Tier II accounts are optional accounts which can be accessed based on eligibility and any conditions. The two accounts are very different when it comes to access and tax. You cannot assume that Tier II will have any tax benefits as the eligible contributions are only in Tier I. [Verify before publishing: What is the eligibility, withdrawal conditions and tax for Tier II in current model?]

Ensure you’re aware of any changes in the rules by checking the current PFRDA rules and official NPS resources. Sometimes this can be covered in a short article or social media post but you may be on a different model. Government employees, corporate and all citizen models will have different conditions. The exact model you’re on is a fact.

Contributions and Investments

Your contributions will go into your NPS account and be invested according to your chosen options within the relevant model. There are various investment options available and they may have different levels of exposure to equities, corporate bonds, government securities and other acceptable assets. Each will carry different risks. Equities can be volatile, corporate bonds can be at risk of interest rates and credit risk and government securities will still have market risk as they can be sold before they mature.

Some schemes will allow you to choose your asset allocation or investment manager within certain conditions. Ensure you understand what conditions apply to your account by looking at official resources. Don’t choose an asset allocation purely because it has had higher returns in the past. This is a long term account and you won’t know the balance on the day you exit.

Retirement Planning

Whilst calculators can show you what a large balance you’ll have after years of contributing, you’ll need to remember this is just an estimate. It won’t take into consideration inflation and how much this will really be worth. It also doesn’t guarantee the balance will be achieved. You’ll have to work with one rate of return whereas your investments will fluctuate.

When planning for your pension income you’ll need to think about how long you’ll need the money for, how much you expect to spend in your household, healthcare costs, dependants and other sources of income. The NPS is part of a wider pension and savings system so whilst you should understand what you’ll be spending in the future, this will depend on the rules of your account and the decisions you’ve made.

Tax

There can be tax implications for contributing to and withdrawing from your NPS. This will depend on your eligibility, employment, what type of contribution you’re making, tax regime and current laws. Don’t assume a limit from an old article as this may have changed. Ensure you have a good understanding of what you can claim based on the current guidance from the Income Tax Department. [Verify before publishing: What is the current level of deductions for employee, employer and individual contributions in the Income-tax Act, 2025 for Tax Year 2026-27? What section numbers are these?]

There can be tax implications based on when you exit your account. If you take a lump sum, buy an annuity and receive income from it this can be taxed differently. There may also be conditions around partial withdrawals and full exits.

Exiting Your Account

There are rules around exiting your NPS account. This can depend on your age, why you’re exiting, what model you’re on, what balance you have and the current regulations. In some cases you’ll be required to purchase an annuity using a portion of your corpus. You’ll need to understand what the terms are and how this will be taxed.

An annuity is not the same as having liquidity. Once you’ve purchased an annuity you may have limited access to your initial capital. The amount you receive will vary depending on the product. This article isn’t recommending any annuity providers or exiting methods but explains why you should understand this part of your account before contributing for many years.

Liquidity and Fees

Tier I accounts are intended for retirement and may have restrictions on withdrawing funds. This means they may not be suitable for holding funds which you may need to access soon. An emergency fund and short term savings are different products. If you need to access cash for medical bills or temporary employment gaps you should understand what the partial withdrawal conditions are.

You may have charges for maintaining your account, transactions and funds. Ensure you’re aware of the current charges by looking at the official schedule. Even a small charge can add up over time. Ensure you’re comparing like-for-like.

Misconceptions

NPS doesn’t guarantee a fixed return. Not all tiers will have the same tax benefits. The balance isn’t guaranteed to be a set amount of pension. The exit rules may vary for different subscribers. This can cause you to focus on the positive aspects and ignore the limitations.

You may also delay researching the exit rules. Understanding the terms will help you understand how this can work for you in your overall plan. By reading the rules early on you’ll understand the balance between a retirement focused account and flexibility.

Checklist

Before opening or changing your account understand what model you’re on. Ensure you’re eligible and understand how your account works. Look at your investment options, risks and fees. Ensure you understand the latest tax rules. Keep records of your contributions. If your employment has changed check if there are any corporate or employer contributions to consider.

Use the PFRDA website to understand the current regulations and subscriber guidance. Use the Income Tax Department resources to understand any tax implications. If there are specific circumstances around your exit, disability, death, employment status etc then general education may not cover all conditions.

Summary

The NPS is a retirement focused account with investments, exit rules and tax. Tier I and Tier II aren’t interchangeable and the model you’re on can impact things. Understand the risks, limitations, fees and exit process before assuming the balance will be your pension income. This is an educational article and cannot advise you what to contribute or choose.

Employer Contributions

Some individuals will come across NPS through their employer. How they contribute, record and are taxed may vary. Ensure you’re aware of how much has actually been contributed to your account by looking at your payslips, any communication from your employer and your account statements. If you’re receiving an employer contribution as part of your compensation understand how it will be described in your employment documents and how it will be taxed currently.

Ensure you keep records of your confirmation of contributions and annual statements. Ensure you’re aware of what you’re being paid in your payroll and what your account provider is showing. This is particularly important towards the end of a tax year. If they don’t match contact your employer or account provider via their official channels.

Review Retirement Assumptions

Your retirement age, family commitments and expected spending can change throughout your working life. Whilst it’s a good idea to periodically review why you’re saving for retirement, don’t make a change due to short term market fluctuations. Consider the rules of your account, what assets you’re invested in, fees and how this fits into your wider household. You’re not trying to predict everything that will happen but to ensure you’re not leaving your assumption in place forever.

Continue reading

• Compare retirement-linked options in ELSS, PPF, and NPS Compared.
• Review how tax comparisons work in Old vs New Tax Regime.

Educational information only. Verify current rules and consider qualified advice for personal decisions.