National Pension System
A pension account you fill yourself, with an extra ₹50,000 deduction.
NPS is a low-cost, market-linked retirement account run under the pension regulator (PFRDA). You choose how much goes into equity, corporate bonds and government bonds, it stays put until 60, and part of it turns into a monthly pension when you exit.
- Who can open
- Indian citizens and NRIs, age 18 to 70
- Minimum to keep it active
- ₹1,000 a year in Tier I
- Locked until
- Age 60, with limited partial withdrawals
- Extra deduction
- Up to ₹50,000 under 80CCD(1B), old regime
Figures and limits are rules as of 2026, check current rules before you invest.
In plain words
How NPS works, start to finish
You get a permanent retirement account number (PRAN). Every rupee you put in buys units in pension funds that invest in shares and bonds. The account grows with the market until you turn 60.
At exit, you take part of the money as a lump sum and use the rest to buy an annuity, which is a policy from a life insurer that pays you a fixed amount every month for life. That compulsory annuity is what makes NPS a pension and not just another investment.
Costs are among the lowest of any market-linked product: the fund management charge is a small fraction of a percent a year. The trade-off is that your money is locked for a long time, and you cannot pull it all out at will.
Open and get a PRAN
KYC with PAN, Aadhaar and a bank account. Takes a day or two.
Pick your mix
Choose a pension fund manager and either set the asset split yourself or let it shift with age.
Contribute for years
Monthly, yearly, or whenever you have spare cash. Minimum ₹1,000 a year in Tier I.
Exit at 60
Part lump sum, part annuity that pays you every month.
Two accounts
Tier I and Tier II are not the same thing
Tier I is the real pension account and carries the tax benefit. Tier II is an optional add-on that works more like an ordinary investment account. You need Tier I before you can open Tier II.
| Tier I (pension account) | Tier II (voluntary account) | |
|---|---|---|
| Is it compulsory? | Yes, this is NPS | No, optional |
| Minimum contribution | ₹500 to open, ₹1,000 a year after | ₹1,000 to open, no yearly minimum |
| Withdrawals | Locked until 60; partial withdrawal for set reasons after 3 years | Withdraw any time |
| Tax deduction on what you put in | Yes: 80CCD(1) and the extra 80CCD(1B) | No (except a narrow case for central government staff) |
| Annuity at exit | Required for part of the corpus | Not required |
| Who it suits | Anyone building a retirement income | Rarely the first choice; a mutual fund usually does the same job with simpler tax |
Rules as of 2026, check current rules. Partial withdrawal reasons include children's education or marriage, buying a first house and treatment of serious illness, with limits on amount and frequency.
Where the money goes
Four asset classes, two ways to choose
Your contributions are spread across up to four asset classes. You can set the split yourself (Active choice) or let it reduce equity automatically as you age (Auto choice).
Equity
Shares of large listed companies, mostly index-linked. The growth engine, and the bumpiest part.
Up to 75% under Active choice
Corporate bonds
Bonds and debt papers of companies and public sector bodies. Steadier, with some credit risk.
Up to 100%
Government securities
Central and state government bonds. Low credit risk, but values move when interest rates change.
Up to 100%
Alternative assets
Real estate and infrastructure trusts and similar instruments. A small slice at most.
Up to 5%
Active choice
You decide the percentage in E, C, G and A, and change it up to a few times a year. Good if you will actually revisit it. Equity is capped at 75%, and the cap tapers after age 50.
Auto choice (lifecycle)
Pick aggressive, moderate or conservative. Equity starts high and steps down each year from your mid-30s, so the account gets calmer as 60 gets closer. Good if you want it to run on its own.
Asset limits as per PFRDA rules as of 2026, check current rules. NPS returns are market-linked and not fixed in advance.
Tax benefit
Three sections, one extra ₹50,000
The headline benefit of NPS is Section 80CCD(1B): a deduction of up to ₹50,000 a year on your own Tier I contribution, over and above the ₹1.5 lakh limit of Section 80C. It is available only in the old tax regime.
Under the new regime, the employee's own contribution gets no deduction, but your employer's contribution under 80CCD(2) still does. If your employer offers NPS, that is often the bigger win.
What ₹50,000 under 80CCD(1B) saves in a year
| Your slab (old regime) | Tax saved incl. 4% cess |
|---|---|
| 5% | ₹2,600 |
| 20% | ₹10,400 |
| 30% | ₹15,600 |
Excludes surcharge. Rules as of 2026, check current rules. We check which regime suits you before suggesting NPS for tax.
At 60
What happens when you exit
NPS forces part of your savings into a lifelong income. Here is one worked example so the numbers feel real.
Example: ₹5,000 a month from age 30 to 60
- Total you put in
- ₹18,00,000
- Corpus at 60, at 10% a year
- about ₹1.14 crore
- Lump sum if 60% is taken
- about ₹68.4 lakh
- Annuity from the other 40%
- about ₹45.6 lakh
- Pension at 6% annuity rate
- about ₹22,800 a month
10% growth and 6% annuity are assumed rates for illustration, not a promise. Actual returns depend on markets and can be lower. Annuity income is taxable as income. Annuities are insurance products: insurance is the subject matter of solicitation.
- Lump sum share: the long-standing rule is up to 60% tax-free as a lump sum, with at least 40% going into an annuity. PFRDA has been revising these limits for non-government subscribers, so we check the exit rules in force when you reach 60.
- Small corpus: if the total is below a threshold set by PFRDA, you can take the full amount without buying an annuity.
- Exit before 60: allowed after a minimum period, but most of the corpus (traditionally 80%) must buy an annuity.
- Defer if you like: you can keep the account invested past 60, up to 75, and draw the lump sum in instalments.
- On death: the full corpus goes to your nominee. Keep the nomination updated.
Honest fit check
NPS is a good fit for some people, not everyone
Usually makes sense if
- You file under the old regime and have used up 80C
- Your employer contributes to NPS for you
- You want retirement money you cannot touch on impulse
- You have no employer pension and want a monthly income later
Think twice if
- You may need the money before 60
- You are on the new regime with no employer contribution
- You have no emergency fund or health cover yet
Side by side
NPS next to PPF and an equity SIP
Most of our clients use NPS alongside these, not instead of them. Each does a different job.
| NPS Tier I | PPF | Equity mutual fund SIP | |
|---|---|---|---|
| Return type | Market-linked | Government-set rate, reset each quarter | Market-linked |
| Lock-in | Until 60 | 15 years, partial withdrawal from year 7 | None (3 years for ELSS) |
| Equity exposure | Up to 75% | None | 65% to 100% |
| Tax on what you put in | 80C plus extra ₹50,000 (old regime) | 80C (old regime) | Only ELSS, under 80C |
| Money at the end | Part lump sum, part annuity | Fully tax-free | Fully yours, gains taxed |
Rules as of 2026, check current rules. Mutual fund investments are subject to market risks, read all scheme related documents carefully. Read more in NPS vs PPF, explained.
Is NPS safe? Can I lose money?
NPS is regulated by PFRDA and the money sits with pension fund managers under strict rules. But the value moves with markets, so it can fall in a bad year, especially the equity part. Over 20 or 30 years those swings matter far less than they do over two.
Should I choose Active or Auto choice?
If you will not look at the account more than once a year, Auto choice is the safer default because it cuts equity as you age. If you are under 40 and comfortable with ups and downs, Active choice with 60% to 75% equity is common. We set this with you based on your risk profile.
Can I claim 80CCD(1B) in the new tax regime?
No. The extra ₹50,000 deduction works only in the old regime. In the new regime, only your employer's contribution under 80CCD(2) is deductible. Rules as of 2026, check current rules.
Can I take money out before 60?
From Tier I, only partial withdrawals for specific needs such as children's education, marriage, a first house or serious illness, after three years and within limits. A full exit before 60 needs most of the corpus to go into an annuity. Tier II has no such lock.
Is the pension at 60 fixed?
The annuity rate is fixed when you buy it, based on rates on offer at that time, and then stays the same for life. What you cannot know today is the size of the corpus or the annuity rates 25 years from now.
I already have an NPS account. Can you review it?
Yes. Share your current asset split and fund manager and we will check whether the mix still suits your age and goal, and whether you are using the tax benefit fully.
Talk to us
Find out if NPS belongs in your retirement plan
Tell us your age, tax regime and what you put away today. We reply on WhatsApp with whether NPS adds anything for you, how much to put in, and which mix fits.
NPS returns are market-linked and not fixed in advance. Any figure we share is an assumed rate for illustration.
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