NPS

The National Pension System is a defined-contribution retirement scheme. You — and in some cases your employer — contribute to a personal account; pension fund managers invest the money in equity, corporate bonds, government securities and other permitted assets; and the corpus you build is used in retirement, partly as a lump sum and partly to buy an annuity that pays a regular pension.

Why it matters

NPS is built specifically for retirement, with low costs, a choice of asset mix and rules that discourage early withdrawal. It is one of the few products where retirement income is designed in, through the annuity requirement.

How to read it

• Choice of allocation. Active choice lets you set the mix within limits; auto choice shifts from equity towards debt as you age.
• Two tiers. The Tier 1 account is the pension account with withdrawal restrictions; Tier 2 is an optional, more flexible add-on.
• Exit rules. At normal exit, part of the corpus can be taken as a lump sum and the rest buys an annuity. PFRDA revised these rules in December 2025, allowing many non-government subscribers a larger lump-sum share than before.
• Returns are market-linked. They depend on the asset mix and pension fund you choose.

Common misconceptions

• “NPS is a fixed pension.” It is not. The corpus depends on contributions and market returns, and the pension depends on annuity rates when you buy.
• “All of it is tax-free.” Tax treatment varies by contribution type, tax regime and withdrawal; some portions may be taxable.

In India: Tax benefits for NPS contributions differ between the old and new tax regimes and between your own and your employer’s contributions. Withdrawal rules and their tax treatment were revised recently. Check PFRDA’s latest rules and current tax provisions.