NPS vs APY explained: Features, eligibility, returns, and tax rules

Launched in 2004, NPS is a low-cost pension scheme designed for all citizens of India that offers benefits of both retirement and market-linked investment. The scheme is mandatory for central government employees, while individuals can also open an account on a voluntary basis. As per PFRDA, 39 states and UTs have also adopted the scheme for its employees.

It offers two accounts: Tier I and Tier II. Tier I is a compulsory pension account that comes with specific withdrawal restrictions, whereas Tier II is a voluntary savings account offering greater flexibility for withdrawals. Tier-II accounts don’t have an upper limit on investment. You need to have an active NPS Tier-I account to invest on Tier-II.

Policyholders should be aged between 18 to 70 years to avail of the pension scheme. In the case of contributions made by an individual they are solely responsible to maintain their NPS account starting as low as Rs 500, and maintain a minimum of Rs 1,000 in a financial year. Further investment should be made in multiples of Rs 250.

Upon maturity at age 60, subscribers can choose to withdraw up to 60 percent of their accumulated pension in lump sum, while 40 percent must be used for monthly pension of annuity. Moreover, partial withdrawal up to 25 percent of a subscriber's own contribution is allowed after three years. PFRDA has also released a draft proposal recently with significant changes. One of the changes proposed is witdrawal after 15 years and one doesn't have to wait till turn 60.

One can also opto for corporate NPS. For corporate NPS, monthly employer contribution is upto 10 percent of basic salary and dearness allowance. However,  employer NPS contribution limit is 14 percent in the case of central government employees.

Return on maturity: NPS offers two investment options: Active and Auto. In the active choice investors can allocate their contributions across four asset classes: Equity (E), Corporate Debt (C), Government Securities (G), and Alternative Investment Funds (AIF). The equity exposure is recently increased to 100 percent under multiple scheme framework, which means one can run schemes from different Central Record Keeping Agencies (CRAs) simultaneously under a single PRAN.  NPS account holders can earn between 8 to 12 percent return every year, depending on the fund chosen.

Tax benefit: NPS tier-I account comes with various deductions under the Income Tax Act, 1961. Individual NPS subscribers under old tax regime get up to Rs 1.5 lakh deduction under Section 80C. There is also additional deduction of Rs 50,000 available under section 80CCD (1B) under old tax regime for NPS contribution.

Employer contribution towards NPS account can be claimed as a deduction under Section 80CCD(2). There’s no fixed monetary cap on the deduction you can claim, but it’s limited to 10 percent of your basic salary under the old tax regime and 14 percent under the new regime. However, the total employer contribution to NPS, Provident Fund, and superannuation is subject to a combined ceiling of Rs 7.5 lakh per year any amount exceeding this limit becomes taxable in your hands. However, no tax benefit is available on contributions to the Tier 2 account except for central government employees.

How to apply: While the enrollment of central government employees and corporations opting for the NPS is done in-house, individual subscribers can voluntarily enroll themselves through banks as well as online through National Pension System (NPS) portal, and submit relevant documents. Upon completion of verification, you’ll receive a permanent retirement account number (PRAN) card and a welcome kit by post, which will be helpful in identification and managing the NPS account.

Atal Pension Yojana

Launched in 2015, APY is the central government guaranteed pension scheme designed for all citizens, especially those working in unorganized sectors who are not covered under any social security statutory and are non-taxpayers. Here it is important to note that effective from October 1, 2022, any citizen who is or has been an income-tax payer is no longer eligible to open a new APY account. Hence, unlike NPS, access to APY is limited now.

Regulated by PFRDA, the APY boasts of over 7.65 crore subscribers as of May 2025. The pension scheme helps retired subscribers to avail of minimum pension of Rs 1,000 to Rs 5000 per month after retirement.

Account type: A single subscriber can open an APY account, with benefits extended to their spouse and nominees. Subscribers should be aged between 18 and 40 years at the time of opening an APY account, with forms available across banks and the nearest post office.

Investment: Subscribers can open an APY account at a minimal contribution fixed as per age, and monthly deposits are made in accordance with the preferred pension amount of Rs 1,000, Rs 2,000, Rs 3,000, and Rs 4,000 per month. Contribution can be made on a monthly, quarterly or half-yearly basis.

Return on maturity: The central government makes a co-contribution of 50 percent of the subscriber’s total contribution up to Rs 1,000 per month. Premature withdrawal comes along with accrued interest upon the principal amount after deduction of maintenance charges.

Tax benefit: Subscribers are eligible for tax benefits under section 80CCD(1).

How to apply: Eligible subscribers can enroll themselves online through the National Pension System (NPS) portal, or by visiting the nearest banks or post office. Upon completion of verification, you’ll receive a PRAN card and for managing the APY account.