In an era of growing financial awareness, Indian investors are actively seeking tax-saving instruments that also ensure long-term wealth creation. One such government-backed option is the National Pension System (NPS), especially Tier 1 accounts which offer exclusive tax benefits and attractive returns. If you’re planning for retirement and want to maximize tax deductions under Section 80CCD(1B), this detailed guide will walk you through the best NPS Tier 1 funds for tax saving in 2025.
What is the NPS Tier 1 Account?
NPS Tier 1 is the primary pension account under the NPS framework. It’s mandatory if you want to claim tax deductions under Section 80CCD, and it is specifically designed for retirement savings.
Key Features of Tier 1 Account:
| Feature | Details |
|---|---|
| Lock-in Period | Till retirement (60 years), partial withdrawal allowed |
| Minimum Annual Contribution | ₹1,000 |
| Tax Benefits | Up to ₹2 lakh (₹1.5L under 80C + ₹50K under 80CCD(1B)) |
| Withdrawals | Limited; annuity purchase mandatory at retirement |
| Fund Options | Equity, Government Bonds, Corporate Bonds, Alternative Assets |
Why Choose NPS Tier 1 for Tax Saving?
NPS Tier 1 stands out due to its triple tax advantage:
- Tax Deduction under Section 80CCD(1) – up to ₹1.5 lakh (included in 80C).
- Additional ₹50,000 under Section 80CCD(1B) – exclusively for NPS.
- Tax-Deferred Growth – returns are not taxed annually.
- Partial Tax Exemption at Maturity – 60% lump sum is tax-free, 40% must go into an annuity (taxable as per slab).
Types of NPS Fund Options
NPS offers four types of asset classes managed by Pension Fund Managers (PFMs):
| Asset Class | Description | Risk Level |
|---|---|---|
| E | Equity (up to 75%) | High |
| C | Corporate Debt Instruments | Moderate |
| G | Government Securities | Low |
| A | Alternative Investment Funds (max 5%) | Moderate to High |
You can opt for Active Choice (self-allocate funds) or Auto Choice (age-based allocation).
Top Pension Fund Managers (PFMs) in India (2025)
There are currently 10 NPS fund managers appointed by PFRDA. Here are some of the most reputed:
| Fund Manager | Established | Notable Strength |
|---|---|---|
| HDFC Pension Fund | 2013 | Strong equity performance |
| ICICI Prudential Pension Fund | 2009 | Balanced approach across asset classes |
| SBI Pension Funds | 2007 | Backed by India’s largest bank |
| Kotak Mahindra Pension Fund | 2013 | Aggressive equity allocation |
| LIC Pension Fund | 2010 | Strong debt management |
| UTI Retirement Solutions | 2008 | Solid long-term track record |
Best NPS Tier 1 Funds Based on Historical Returns (As of 2025)
Let’s compare the 3-year and 5-year returns across equity (E), corporate (C), and government (G) asset classes.
1. Equity Fund Performance (Asset Class E)
| Fund Manager | 3-Year CAGR | 5-Year CAGR |
|---|---|---|
| HDFC Pension Fund | 14.85% | 13.55% |
| ICICI Prudential Pension Fund | 14.40% | 13.20% |
| Kotak Mahindra Pension Fund | 14.10% | 13.10% |
| SBI Pension Fund | 13.90% | 12.85% |
| UTI Retirement Solutions | 13.70% | 12.50% |
Winner: HDFC Pension Fund (Tier 1 – Equity) consistently tops the list with strong and stable performance.
2. Corporate Debt Fund Performance (Asset Class C)
| Fund Manager | 3-Year CAGR | 5-Year CAGR |
|---|---|---|
| LIC Pension Fund | 9.60% | 9.15% |
| HDFC Pension Fund | 9.40% | 8.90% |
| UTI Retirement Solutions | 9.20% | 8.70% |
| SBI Pension Fund | 9.00% | 8.60% |
| Kotak Mahindra Pension Fund | 8.80% | 8.40% |
Winner: LIC Pension Fund dominates in corporate bonds.
3. Government Securities Performance (Asset Class G)
| Fund Manager | 3-Year CAGR | 5-Year CAGR |
|---|---|---|
| SBI Pension Fund | 8.85% | 8.50% |
| ICICI Prudential Pension Fund | 8.75% | 8.45% |
| HDFC Pension Fund | 8.60% | 8.30% |
| LIC Pension Fund | 8.55% | 8.25% |
| Kotak Mahindra Pension Fund | 8.40% | 8.10% |
Winner: SBI Pension Fund has historically provided stable returns in G-sec investments.
Best NPS Tier 1 Fund Combinations for Tax Saving in 2025
Depending on your risk appetite, here are some ideal combinations using Active Choice:
1. Aggressive Investor (Age < 40)
| Asset Class | Allocation | Best Fund Manager |
|---|---|---|
| Equity (E) | 75% | HDFC Pension Fund |
| Corporate (C) | 15% | LIC Pension Fund |
| G-Sec (G) | 10% | SBI Pension Fund |
2. Moderate Investor (Age 40–50)
| Asset Class | Allocation | Best Fund Manager |
|---|---|---|
| Equity (E) | 50% | Kotak Pension Fund |
| Corporate (C) | 30% | HDFC Pension Fund |
| G-Sec (G) | 20% | SBI Pension Fund |
3. Conservative Investor (Age 50+)
| Asset Class | Allocation | Best Fund Manager |
|---|---|---|
| Equity (E) | 25% | ICICI Pension Fund |
| Corporate (C) | 40% | LIC Pension Fund |
| G-Sec (G) | 35% | SBI Pension Fund |
You can switch fund managers or asset allocation twice a year.
Tax Benefits of Investing in NPS Tier 1
1. Section 80CCD(1)
Part of Section 80C. Maximum deduction: ₹1.5 lakh.
2. Section 80CCD(1B)
Exclusive additional benefit: ₹50,000 extra deduction.
| Tax Section | Limit (₹) | Applicable To |
|---|---|---|
| 80C (incl. 80CCD(1)) | ₹1,50,000 | All taxpayers |
| 80CCD(1B) | ₹50,000 | Additional for NPS |
| Total | ₹2,00,000 | Effective deduction |
NPS vs Other Tax-Saving Instruments
| Feature | NPS Tier 1 | ELSS | PPF |
|---|---|---|---|
| Lock-in Period | Till 60 years | 3 years | 15 years |
| Returns (Avg.) | 9–12% | 12–15% | 7–8% |
| Tax Benefit | Up to ₹2 lakh | ₹1.5 lakh | ₹1.5 lakh |
| Risk | Moderate to High | High | Low |
| Withdrawal Rules | Limited | Freely after 3 yrs | Partial after 6 yrs |
Takeaway: NPS offers the highest tax-saving potential when combining 80C and 80CCD(1B) benefits, with retirement security.
How to Invest in NPS Tier 1 Account
Steps:
- Visit: https://enps.nsdl.com
- Choose CRA: NSDL or KFinTech
- Select Tier 1 Account
- Pick a Pension Fund Manager
- Select Active or Auto Choice
- Make Initial Contribution (₹500 or more)
- Get PRAN (Permanent Retirement Account Number)
Final Thoughts
NPS Tier 1 is not just a powerful retirement tool, but also a smart and effective way to save income tax. By selecting the best-performing fund managers and optimizing your asset allocation based on risk appetite, you can enjoy inflation-beating returns with unmatched tax benefits.
Whether you’re a salaried professional or self-employed, utilizing the additional ₹50,000 tax deduction under Section 80CCD(1B) can significantly reduce your tax liability.
So, don’t delay—start investing in the best NPS Tier 1 funds for your long-term financial security and tax savings today!
Frequently Asked Questions (FAQs)
Q1. Can I invest more than ₹50,000 in NPS Tier 1?
Yes, there’s no upper limit. However, tax benefit under Section 80CCD(1B) is limited to ₹50,000.
Q2. Which is the best NPS fund manager in 2025?
HDFC Pension Fund has delivered the best equity returns in recent years.
Q3. How often can I switch fund managers in NPS?
Twice a financial year.
Q4. Can I claim both 80C and 80CCD(1B) deductions?
Yes, for a total deduction of ₹2 lakh per year.