What is the National Pension Scheme (NPS)?

NPS is a pension scheme where you can voluntarily invest for your retirement.

You can invest your savings to build a retirement corpus slowly.

Investments of up to ₹50,000 a year can be used to save taxes in a financial year by investing in NPS.

The National Pension Scheme has two types of accounts called ‘tiers.’

The NPS investment can be divided into two tiers:

What are Tier 1 investments in NPS?

This account is only for your retirement savings exempted from tax under section 80C of the Income Tax act.
You cannot withdraw your invested amount before you turn 60.
Tier 1 of NPS is completely a retirement savings account.

What are Tier 2 investments in NPS?

Tier 2 investments in NPS are additional voluntary investments that can be redeemed at any time.
You do not get any tax benefit on investing in Tier 2 NPS.

What are the investment options available at NPS?

The National Pension Scheme divides investments based on the degrees of risk an individual can take.

Asset Class – E:

Only invest in equities.
Asset Class – C:

Invests in Fixed Income Securities other than Government Debts or Bonds.
Asset Class – G:

Invests only in Government Debt and Bonds.
Asset Class – A:

Invests in Alternative Investments (unusual investments that are highly risky and require a very high minimum investment) like CMBS, MBS, REITS, AIFs, InvIts etc.

How can you choose between these asset classes in NPS?

You can either actively choose to invest in these classes Or, Select “Auto Choice” – Lifecycle funds.

The Active Choice Option

In the active choice option

The Auto-Choice Option

In the auto choice option, you can invest in one of the three life cycles:

LC75 – Aggressive Life Cycle Fund:

Here, exposure to equities is 75% till 35 years of age. After that, the equity proportion decreases with age. This is because your ability to take risks declines with age. Learn about equities with our guide.
LC50 – Moderate Life Cycle Fund:

Here, the proportion of equities is 50% till 35 years of age. After that, the equity proportion decreases with age.
LC25- Conservative Life Cycle Fund:

Here, the proportion of equities is 25% till 35 years of age. After that, the equity proportion decreases with age.

You can either invest in any of the above life cycle options or go for the default selection.

Let's learn about the characteristics of NPS in the next section