How it works
You open an account and receive a Permanent Retirement Account Number (PRAN) that stays with you for life. Each contribution buys units of pension funds that invest in four asset classes: equity (E), corporate bonds (C), government securities (G) and alternative assets (A). Over the years the corpus grows with the markets. At exit, part can be taken as a lump sum and the rest buys a pension (an annuity).
Tier 1 and Tier 2
| Tier 1 | Tier 2 | |
|---|---|---|
| Purpose | Retirement account | Voluntary savings account |
| Withdrawals | Restricted until exit, with limited partial withdrawals for specified purposes | Free to withdraw any time |
| Minimum to open | ₹500 | ₹1,000 |
| Tax benefit | Yes (see below) | None for most subscribers |
| Needs a Tier 1 account | - | Yes |
Investment choices
- Active choice: you decide the split between asset classes; the equity share can go up to 75% in Tier 1.
- Auto choice (lifecycle): the mix shifts automatically from equity towards safer assets as you age.
Exit rules after December 2025
PFRDA notified changes to the exit and withdrawal regulations on 12 December 2025 for non-government subscribers (the All Citizen and Corporate models), widening what you can do at normal exit:
- Corpus up to ₹8 lakh: you may withdraw the whole amount or take periodic payouts.
- Corpus above ₹8 lakh and up to ₹12 lakh: up to ₹6 lakh as a lump sum, the balance as systematic withdrawal or annuity.
- Corpus above ₹12 lakh: up to 80% as a lump sum, with at least 20% used to buy an annuity.
This replaced the earlier rule of at most 60% lump sum and at least 40% annuity. The notification also extends the age up to which you can stay invested. Read the current regulation before planning, because exit rules are the part of NPS that has changed most.
Tax benefits
| Provision (old numbering) | What it gives | Regime |
|---|---|---|
| Section 80CCD(1) | Counts within the ₹1.5 lakh overall limit | Old regime |
| Section 80CCD(1B) | Extra deduction of up to ₹50,000 for your own Tier 1 contribution | Old regime only |
| Section 80CCD(2) | Employer's contribution to your NPS: up to 14% of salary for all employees under the new regime; in the old regime 10% of salary (14% for central/state government employees) | Both regimes |
Under the Income-tax Act, 2025, which applies from 1 April 2026, these sections were renumbered. The limits above are the commonly cited ones; confirm the current provision before filing. The employer route under the new regime is the one deduction that still works for salaried people who have moved to the new regime.
A 30-year example (assumptions, not forecasts)
Strengths and limits
- Strengths: a built-in discipline until retirement, very low fund-management costs, the extra ₹50,000 deduction, a choice of equity share and an employer-contribution deduction.
- Limits: limited access to your money; part of the corpus must buy an annuity; annuity income is taxable; your result depends on the funds you choose and on markets.
NPS vs ELSS vs PPF (quick view)
| NPS | ELSS | PPF | |
|---|---|---|---|
| Lock-in | Until retirement age (with limited partial withdrawals) | 3 years | 15 years |
| Return type | Market-linked | Market-linked | Government-set |
| Extra tax feature | ₹50,000 deduction (old regime) | Within ₹1.5 lakh (old regime) | Within ₹1.5 lakh (old regime) |
Questions people ask
What is the full form of NPS?
National Pension System.
Who regulates NPS?
The Pension Fund Regulatory and Development Authority (PFRDA).
What is the NPS lock-in?
Tier 1 is locked until retirement age, apart from limited partial withdrawals.
How much can I withdraw at retirement?
For non-government subscribers with a corpus above ₹12 lakh, up to 80% as a lump sum and at least 20% in an annuity under the December 2025 rules.
Is NPS better than mutual funds?
Different tools. NPS adds discipline and a tax feature but limits access; mutual funds are flexible. Many people use both.
Is NPS taxable?
Contributions can be deductible; the annuity income is taxable. Lump-sum treatment depends on current rules.
Keep going
Run the numbers
NPS calculator
Also useful: Retirement calculator
How we can help
Sources
- PFRDA, "Enhancement of Lump sum Withdrawal limit on Exit" (https://www.pfrda.org.in/documents/33652/151620/Enhancement+of+Lump+sum+Withdrawal+limit+on+Exit.pdf)
- PFRDA (Exits and Withdrawals under NPS) (Amendment) Regulations, 2025, 12 December 2025
- Income Tax Department guidance on sections 80CCD(1B) and 80CCD(2)
- Income-tax Act, 2025.
Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. This page is general education, not personal advice. Back to the full glossary