How NPS works
The National Pension System is a defined-contribution retirement scheme regulated by PFRDA. You contribute during your working life, the money is invested in a mix of equity, corporate bonds and government securities, and at 60 the accumulated corpus is split: part comes to you as a lumpsum, part must buy an annuity that pays a monthly pension for life.
Tier-1 and Tier-2
| Tier-1 | Tier-2 | |
|---|---|---|
| Purpose | Retirement account | Voluntary savings |
| Lock-in | Until age 60 | None |
| Tax deduction | Yes — 80CCD(1) and 80CCD(1B) | Only for government employees |
| Minimum contribution | ₹1,000 a year | ₹1,000 to open |
| Withdrawal | Restricted | Anytime |
The withdrawal rule at 60
At least 40% of the corpus must be used to purchase an annuity from an approved insurer. The remaining 60% can be withdrawn as a lumpsum, and that lumpsum is entirely tax-free. If the total corpus is ₹5,00,000 or less, you may withdraw all of it without buying an annuity.
The tax deductions — NPS's main draw
NPS offers deductions available nowhere else, but only under the old tax regime:
| Section | Limit | Notes |
|---|---|---|
| 80CCD(1) | ₹1,50,000 | Within the overall 80C limit — shared with PPF, ELSS, insurance |
| 80CCD(1B) | ₹50,000 | Over and above 80C. Exclusive to NPS. |
| 80CCD(2) | 10% of salary | Employer contribution. 14% for government employees. Available in the new regime too. |
The ₹50,000 under 80CCD(1B) is the genuinely distinctive benefit. For someone in the 30% slab it saves ₹15,600 a year in tax, which is an immediate 31% return on that contribution before any market growth.
Note that 80CCD(2) — the employer contribution — remains available under the new regime, which makes employer-routed NPS attractive even for those who have switched.
A worked example
₹18 lakh invested becomes ₹1.14 crore — about 84% of the final figure is growth. Note the pension of ₹22,793 will buy considerably less in 30 years than it does today.
Choosing your investment mix
NPS offers two approaches. Under Active Choice you set the allocation yourself across four asset classes, subject to an equity cap of 75% until age 50, tapering thereafter. Under Auto Choice a lifecycle fund shifts you from equity to debt automatically as you age.
| Class | Invests in | Long-run return |
|---|---|---|
| E — Equity | Listed Indian equities | 11% – 13% |
| C — Corporate bonds | Corporate debt | 8% – 9% |
| G — Government securities | Central and state government bonds | 7% – 9% |
| A — Alternatives | REITs, InvITs, AIFs (max 5%) | Variable |
Auto Choice comes in three flavours: Aggressive (75% equity to age 35), Moderate (50%), and Conservative (25%). For someone in their thirties with a 25-plus year horizon, Aggressive Auto Choice or an Active Choice near the equity cap is the usual recommendation.
Compare NPS against the alternatives with the PPF calculator and the SIP calculator. Many planners suggest NPS for the ₹50,000 exclusive deduction, then equity SIPs beyond that for the liquidity NPS lacks.
Frequently asked questions
How much pension will I get from NPS?
It depends on your corpus, how much of it buys an annuity, and the annuity rate at the time. As a rough guide, a ₹1 crore corpus with the minimum 40% annuitised at 6% pays about ₹20,000 a month.
That pension is taxable at your slab rate, and it is fixed in nominal terms unless you choose an increasing annuity, which pays less at the start.
Is NPS better than PPF?
They solve different problems. NPS is market-linked with higher expected returns and an extra ₹50,000 deduction, but locks money until 60 and forces annuitisation. PPF returns less but is fully tax-free at every stage and matures in 15 years.
Many people use both — NPS for the exclusive 80CCD(1B) deduction, PPF for the tax-free flexibility.
Can I withdraw from NPS before 60?
Partial withdrawal of up to 25% of your own contributions is allowed after three years, for specified purposes: higher education, marriage, buying a home, or treatment of critical illness. A maximum of three such withdrawals is permitted.
Full exit before 60 requires 80% of the corpus to buy an annuity, leaving only 20% as lumpsum — a heavy penalty.
What happens to NPS if I die before retirement?
The entire accumulated corpus is paid to your nominee or legal heir. There is no requirement to purchase an annuity, and the payout is tax-free.
If death occurs after annuitisation, what the nominee receives depends on the annuity variant chosen — joint-life and return-of-purchase-price options pay out, single-life options do not.
Does NPS work under the new tax regime?
Partly. The 80CCD(1) and 80CCD(1B) deductions are not available under the new regime. However, 80CCD(2) — your employer's contribution, up to 14% of salary for the new regime — remains deductible.
If your employer offers NPS as part of your package, it stays worthwhile under the new regime. Self-contributions lose their tax advantage.