NPS: National Pension System

What survives in both regimes is section 80CCD(2), the employer contribution route. That is the deduction worth organising your salary around. The rest of this page is about what you actually get in return for a lock-in that runs to age 60.

What are the key NPS rules and limits?

Tier I or Tier II: which NPS account should you open?

Tier I is the pension account. It costs ₹500 to open and ₹1,000 a year to keep active. Withdrawals follow the exit rules, not your wishes. Every tax benefit attaches to it.

Tier II is an optional savings account. It costs ₹1,000 to open and ₹250 a transaction. Withdrawals are unrestricted. It also carries no tax benefit on contributions or gains, and it cannot exist without an active Tier I.

Be blunt about what that makes Tier II. It is a low-cost fund with no lock-in and no tax advantage. A plain index fund does the same job with a wider choice and clearer tax treatment. Compare it against a low-cost index fund before you use it. Tier I is where the argument for NPS lives.

How do you choose an NPS fund manager and asset mix?

Your money goes into four asset classes. Class E is equity in the futures and options segment. Class C is corporate bonds rated A or above. Class G is government securities and state development loans. Class A is alternate assets.

You pick the mix under Active Choice, or hand it to an age-based Auto Choice glide path. PFRDA caps how much can sit in equity under Active Choice. Check the current cap on the PFRDA site before assuming, because it has been revised more than once.

The fund manager matters less than people expect. All of them run to the same mandate and the same asset class definitions. You can change your pension fund once a financial year and your investment choice four times a year. Use that sparingly. Our page on NPS fund managers covers who runs what.

What happens to your NPS money at 60?

At 60, at least 40% of the corpus must buy an annuity. The other 60% comes to you as a lump sum. If the corpus is ₹5,00,000 or less, you can take all of it and skip the annuity.

Leave before 60 and the split reverses. You need five years of subscription, then 80% must buy an annuity and you get 20%. Full withdrawal is allowed only if the corpus is ₹2,50,000 or less. On death, the whole corpus goes to the nominee or legal heirs.

This is where NPS is oversold as tax-free. PFRDA is clear on the treatment. The 60% lump sum is exempt. The amount used to buy the annuity is exempt. But the annuity income you then receive “will be taxed in the year of receipt”, at your slab rate, for the rest of your life. So a scheme sold as a tax saver hands you a taxable pension.

The compulsory annuity is the real cost

Forty per cent of a lifetime of saving gets locked into an annuity at whatever rate is on offer on the day you turn 60. You do not choose that rate. You do not get the capital back unless you buy a return-of-purchase-price variant, which pays less each month.

Compare that with the alternatives. PPF pays out fully tax-free at maturity. A mutual fund portfolio you draw down yourself keeps the capital in your hands and is taxed only on gains. NPS wins on cost and on the 80CCD(2) route. It loses on flexibility, and the annuity is why.

So the honest use case is narrow. NPS is strong if your employer contributes under 80CCD(2), because that deduction works in both regimes and costs you nothing. It is reasonable if you are on the old regime and have already used your 80C limit. It is weak as a voluntary lump-sum investment for someone on the new regime. Check which regime you are on first, using the old versus new regime comparison, and model the corpus on the NPS calculator.