First published in 2021 and rewritten in October 2026 to reflect current rules. This post is for education only and is not investment advice. Figures and rules change, so check official sources before you act.
The National Pension System (NPS) is a government-backed, market-linked retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). You contribute during your working years, the money is invested in a mix of equity and debt, and at retirement you take part as a lump sum and use part to buy a pension.
The rules changed substantially with amendments PFRDA notified in December 2025, so much of what was written about NPS before then is out of date.
Key takeaways
- NPS is a low-cost, market-linked retirement account regulated by PFRDA.
- Non-government subscribers can now take up to 80% of a larger corpus as a lump sum, up from 60%.
- Only 60% of the corpus is reported to be tax-free. The extra 20% is taxed at your slab rate unless the tax law is amended.
- Pension income from the annuity is taxable.
- It suits disciplined long-term savers who accept limited access to the money.
How NPS works
- Tier I is the main retirement account, with restrictions on withdrawal and the tax benefits.
- Tier II is an optional, flexible savings account with no lock-in and, for most people, no tax benefit.
- Your money is managed by a pension fund manager you choose, across equity, corporate bonds, government securities and a small alternatives bucket.
- You can set the mix yourself (active choice) or let it shift automatically towards debt as you age (auto choice).
Returns are not guaranteed. They depend on how the markets and your chosen funds perform.
NPS exit rules after the December 2025 changes
These are the rules for non-government subscribers at normal exit, as summarised by Finnovate and 1 Finance. Confirm them on the NPS Trust website before relying on them.
| Corpus at exit | Lump sum allowed | Rest |
|---|---|---|
| Up to ₹8 lakh | 100% | No annuity required |
| ₹8 lakh to ₹12 lakh | Up to ₹6 lakh | Balance through an annuity or phased withdrawals over at least six years |
| Above ₹12 lakh | Up to 80% | At least 20% must buy an annuity |
Other reported changes:
- Normal exit is available after 15 years in the scheme or at age 60, whichever comes first.
- You can defer withdrawals and stay invested up to age 85.
- Partial withdrawals are allowed up to four times, each up to 25% of your own contributions, for purposes such as education, a home or medical treatment.
- Leaving early is costly: above a small corpus, at least 80% must go into an annuity.
Government employees remain on a 60% lump sum and 40% annuity split.
How NPS is taxed
- Contributions: your own contributions have qualified for deduction within the overall ₹1.5 lakh limit, plus an additional ₹50,000 exclusively for NPS, under the old tax regime. Employer contributions are deductible within limits under both regimes.
- Lump sum at exit: 60% of the corpus is tax-free. The reports above say the additional 20% now permitted is taxed at your slab rate until the income tax law is changed to match.
- Annuity: no tax when you buy it, but the pension you receive is taxed as income each year.
Tax rules and section numbers have been changing, so confirm the current position with the Income Tax Department or a tax adviser.
Pros and cons of NPS
| Pros | Cons |
|---|---|
| Among the lowest-cost investment products in India | Money is largely locked in until retirement |
| Equity exposure for long-term growth | Part of the corpus must buy an annuity |
| Extra tax deduction for those on the old regime | Pension income is fully taxable |
| Forces retirement discipline | Returns are market-linked, not guaranteed |
So, is NPS worth it in 2026?
It depends on what you need from it.
- It tends to suit salaried people whose employer contributes, people on the old tax regime who use the extra deduction, and anyone who would otherwise spend the money before retirement.
- It suits less well people who need flexibility, who are on the new tax regime with no employer contribution, or who already invest steadily in low-cost equity funds.
The December 2025 changes make NPS noticeably more flexible than it was. The lock-in and the taxable pension remain the main trade-offs.
FAQ
What is NPS?
NPS is the National Pension System, a market-linked retirement savings scheme regulated by PFRDA in which contributions are invested and paid out as a lump sum and pension at retirement.
How much of NPS can I withdraw at retirement?
Non-government subscribers with a corpus above ₹12 lakh can reportedly take up to 80% as a lump sum, with at least 20% used to buy an annuity. Smaller balances can be withdrawn more fully.
Is the NPS lump sum tax-free?
60% of the corpus is tax-free. The extra 20% now allowed is reported to be taxable at slab rates unless the tax law is amended.
Who can open an NPS account?
Indian citizens, resident or non-resident, within the age limits set by PFRDA. Check the NPS Trust website for the current limits.