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What is NPS?
The National Pension System (NPS) is a government-regulated retirement scheme overseen by the Pension Fund Regulatory and Development Authority (PFRDA). You contribute during your working years. Professional pension fund managers invest the money in a mix of equity, corporate bonds and government securities. At retirement you take part of it as a lump sum and use the rest for a regular pension.
NPS is open to Indian citizens aged 18 to 70, including NRIs. Private-sector employees can join on their own (the "All Citizen" model) or through their employer (the "Corporate" model).
NPS at a Glance (October 2026)
Accounts: Tier I is the retirement account, locked until 60, with tax benefits. Tier II is an optional, flexible savings account.
Minimum: Tier I needs ₹500 per contribution and ₹1,000 a year to stay active.
Equity: Up to 75% in standard schemes. New "Multiple Scheme Framework" options allow up to 100%.
At exit (non-government): Take up to 80% as a lump sum. At least 20% buys a pension (annuity).
Returns: They are market-linked and not guaranteed.
How It Works
When you open NPS, you get a PRAN (Permanent Retirement Account Number) that stays with you across jobs and cities. You then choose:
- A pension fund manager, from the PFRDA-registered managers. You can change it once a year.
- An investment choice. Active Choice lets you set your own mix of equity (E), corporate bonds (C) and government securities (G), with equity capped at 75%. Auto Choice uses a life-cycle fund that cuts equity automatically as you age.
Since 1 October 2025, non-government subscribers can also choose schemes under the Multiple Scheme Framework (MSF). The high-risk MSF option can hold up to 100% equity. MSF schemes have a 15-year minimum vesting period. During that time you can move from an MSF scheme to a standard scheme, but you cannot switch freely between MSF schemes.
Tax Benefits: Old vs New Regime
NPS tax benefits depend heavily on which income tax regime you choose. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and carried these benefits forward; the old section numbers are shown for reference.
Who Gets Which Deduction
Your own contribution, within ₹1.5 lakh (old 80CCD(1)): Old regime only. It shares the ₹1.5 lakh limit with PPF, EPF, ELSS and other eligible items.
Extra ₹50,000 for your own contribution (old 80CCD(1B)): Old regime only. This is over and above the ₹1.5 lakh. At the 30% slab it saves up to ₹15,600 in tax a year (₹10,400 at 20%).
Employer's contribution (old 80CCD(2)): Allowed in both regimes. Up to 14% of basic pay plus DA in the new regime, and 10% in the old regime for private-sector employees. Your employer's total contributions to EPF, NPS and superannuation above ₹7.5 lakh a year are taxed as a perquisite.
For people in the new regime (now the default), the most useful NPS benefit is the employer-contribution route. If your employer offers NPS, routing part of your salary into it can cut your taxable income even in the new regime.
Withdrawals and Exit Rules
PFRDA overhauled the exit rules for non-government subscribers in December 2025. Government employees have separate rules, including a larger annuity requirement.
At 60 (or after 15 years in NPS)
- Corpus above ₹12 lakh: Up to 80% as a lump sum or systematic withdrawals. At least 20% must buy an annuity (a lifelong pension).
- Corpus from ₹8 lakh to ₹12 lakh: Up to ₹6 lakh as a lump sum. The rest goes into a systematic redemption over at least 6 years, or an annuity.
- Corpus up to ₹8 lakh: You can withdraw everything.
- Deferring: You can stay invested until 85, and take your money in stages.
Before 60 (early exit)
At least 80% must buy an annuity, and only 20% can be taken as cash, unless your corpus is ₹5 lakh or less. Treat NPS as money for retirement only.
Partial withdrawals
After 3 years in NPS, you can make up to four partial withdrawals before 60, at least four years apart. Each is capped at 25% of your own contributions; the employer's share doesn't count. They are allowed for specific needs such as children's higher education or marriage, a first home, serious illness, or starting a business.
How exit money is taxed
Under current tax law, 60% of the corpus taken as a lump sum is tax-free. Any further lump sum (the extra 20% the new rules allow) is taxed at your slab rate. Pension (annuity) income is taxed every year as income. Partial withdrawals within the rules are tax-free.
Key Benefits and Limitations
- Very low cost: Fund management charges in NPS are among the lowest of any market-linked product in India.
- Extra tax room: The ₹50,000 deduction (old regime) and the employer route (both regimes) go beyond what PPF or ELSS offer.
- Equity exposure with discipline: The long lock-in stops you from cashing out in a market fall.
- Portable: One PRAN for life, across employers.
Locked until 60: Tier I money is hard to reach early.
Compulsory annuity: At least 20% must buy an annuity, and annuity income is fully taxable.
Market risk: Returns depend on markets and the fund manager. They are not guaranteed.
Lump sum not fully tax-free: Only 60% of the corpus is tax-free under current law.
Common Mistakes to Avoid
How to Get Started
- Check with your employer first: If they offer NPS under the corporate model, the employer-contribution benefit may be the biggest tax saving available to you.
- Open your account: Use the eNPS portal (with Aadhaar or PAN), a bank, or an authorised point of presence. You will get a PRAN.
- Choose your fund manager and mix: Pick Active or Auto Choice. Match equity to how many years you have until retirement and how much a market fall would worry you.
- Automate contributions: A monthly standing instruction keeps the account active and spreads your entry into the market.
- Add a nominee: Do it when you open the account, and review it after major life events.
Decide your regime first, then your NPS strategy. In the old regime, the extra ₹50,000 deduction makes personal NPS contributions attractive. In the new regime, personal contributions get no deduction, so NPS competes with mutual funds purely on cost, lock-in and the exit rules. The employer route usually makes sense in both regimes. Run both regimes in our income tax calculator before you decide.
Frequently Asked Questions
Q: What is the difference between Tier I and Tier II?
Tier I is the main retirement account. It is locked until 60, has the tax benefits, and follows the exit rules above. Tier II is a voluntary add-on with no lock-in and no tax deduction for most people. You need a Tier I account to open Tier II.
Q: Can NRIs invest in NPS?
Yes. NRIs aged 18–70 can open NPS. Contributions must come through an NRE or NRO account and are subject to FEMA rules. The tax benefits apply only if you have taxable income in India.
Q: What happens to my NPS if I die before retirement?
Your nominee or legal heirs can withdraw the full corpus, or choose to buy an annuity. This is why adding a nominee matters.
Q: Is NPS better than mutual funds for retirement?
Each does a different job. NPS offers lower costs and extra tax benefits in some cases, but has a lock-in until 60 and a compulsory annuity. Mutual funds are fully flexible and have no annuity requirement. Many investors use both. See our retirement planning guide.