National Pension Scheme: Returns, Tax, & Rules [2026]

Overview

The National Pension System (NPS), commonly known as the National Pension Scheme, is a voluntary, market-linked retirement savings scheme regulated by the PFRDA to provide regular income after retirement. Key features include Tier-1 and Tier-2 accounts, tax efficiency, and flexible asset choices.

Core Account Types:

Tier-1 Account: Mandatory retirement account, locked until age 60 or 15 years of subscription, whichever comes first, with a minimum annual contribution of ₹1,000.
Tier-2 Account: Voluntary savings account requiring an active Tier-1 account, with no lock-in or withdrawal restrictions.

Key Benefits & Rules

Investment Choices: Freedom to select fund managers and split funds across equity, corporate bonds, and government securities.
Maturity & Withdrawal: Up to 80% of the corpus can be withdrawn as a lump sum at 60, with at least 20% mandatorily annuitized.
Tax Benefits: Own contributions get old-regime-only deductions up to ₹1.5 lakh (Section 123) plus an extra ₹50,000 (Section 124). Employer contributions are deductible under both regimes.

If you want a retirement account combining low costs, real equity exposure, and a tax break beyond the usual ₹1.5 lakh limit, NPS is probably the most efficient option in India today. It's not perfect because a chunk of your corpus is still locked into a mandatory annuity at exit, but recent reforms have made it considerably more flexible.

This guide covers National Pension Scheme details end to end, Tier 1 versus Tier 2, asset allocation, actual charges, withdrawal rules, the compulsory annuity, tax benefits across both regimes, and how it compares with Public Provident Fund (PPF) and equity mutual funds.

What Is the National Pension Scheme?

The National Pension Scheme is a voluntary, defined-contribution retirement account regulated by PFRDA. Originally built for government employees in 2004, it's now open to any Indian citizen aged 18 to 85, with the option to continue or defer your account until age 85, up from 75 under PFRDA's December 2025 amendment. In this scheme, money is invested across equity, corporate bonds, government securities, and alternative assets by professional fund managers, and payout depends entirely on performance, but there is no guaranteed rate like PPF.

Ditto's Insight

NPS is still a better choice over bundled products like ULIPs or endowment plans. Low costs, real market exposure, and the lock-in's forced discipline usually beat an insurer-run hybrid. Pair it with a standalone term plan for protection and health insurance for medical costs.

National Pension Scheme: Tier 1 Versus Tier 2 Accounts

Every subscriber must open a Tier 1 account first, the actual pension account, locked until age 60 or 15 years of subscription, whichever comes first, and the only one carrying tax benefits. The minimum contribution is ₹500 to open and ₹1,000 per financial year to stay active.

Tier 2 is optional and works more like a mutual fund account: there is no lock-in, you can withdraw anytime, and there is no exit penalty. The trade-off is no tax deduction, unless you're a government employee under a specific 3-year lock-in variant. Both tiers sit under the same Permanent Retirement Account Number (PRAN) and can use different fund managers.

Choosing Your Asset Allocation: Active Choice and Auto Choice

Active Choice lets you set your own split across Equity (E), Corporate Bonds (C), and Government Securities (G).

Note:

PFRDA merged the earlier Alternative Investments (A) scheme into C and E through a one-time, cost-free switching window that closed 25 December 2025, so Scheme A no longer exists as a standalone choice.
Gold and silver ETFs are now permitted under Scheme E instead.
Equity caps at 75% under the legacy common schemes. However, the new Multiple Scheme Framework (MSF) allows funds that go up to 100% equity for subscribers who opt in, since it also lets you hold several schemes under a single PRAN.

Auto Choice (Lifecycle Funds) adjusts automatically as you age, with three variants, Aggressive (LC75, starting at 75% equity), Moderate (LC50), and Conservative (LC25), all shifting toward government bonds as you approach 60.

If you don't actively choose, Moderate applies by default.

For most subscribers under 40 with a long horizon, Active Choice at 75% equity is typically the higher-expected-return path, provided you're comfortable with the volatility.

National Pension Scheme Charges and Fund Manager Options

A retail All-Citizen account currently runs around a 0.12% fund management fee at the top slab, plus roughly 0.20% p.a. in Point of Presence charges (AUM-based from 1 January 2026). Add a 0.003% NPS Trust charge and flat CRA fees of about ₹58-₹69 a year plus ₹3.36-₹3.75 per transaction, and the all-in cost works out to approximately 0.32%+ per annum before GST.

That's still meaningfully cheaper than an actively managed equity mutual fund at 0.5%-2.5%, and cheaper than any ULIP or endowment plan, just not the near-zero figure NPS is often known for.

You can pick from over 10 PFRDA-registered pension fund managers, including SBI, HDFC, ICICI Prudential, and UTI, switching once a year for Tier I if you're unhappy with performance.

Logging Into Your NPS Account via the CRA Portal

Your National Pension Scheme login works through your central record-keeping agency, Protean (formerly NSDL), KFintech, or CAMS, using your PRAN and password.

Visit your CRA's eNPS portal, select "Login with PRAN," and you can view your balance, switch fund managers, or contribute.

First-time users can generate a password using their PRAN, date of birth, and an OTP.

Partial Withdrawal and Exit Rules Under the National Pension Scheme

Before 60, you can withdraw up to 25% of your own contributions, not the full corpus, only for reasons like a child's education, medical treatment, or a first home. This is allowed up to four times before 60, each at least four years apart.

At exit, the rules have changed significantly under PFRDA's December 2025 amendment.

Non-government subscribers can now withdraw up to 80% as a lump sum, with only 20% mandatorily annuitized, down from 60:40. There's an important catch here though. PFRDA permits the 80% withdrawal, but the Income Tax Act still only exempts 60% under Section 10(12A), and the additional 20% is taxable at your slab rate unless the tax law itself gets amended to match.
For a ₹1 crore corpus taking the full 80% lump sum, that means ₹20 lakh lands in your taxable income that year, potentially ₹6.24 lakh in tax at the 30% slab plus cess. It's worth withdrawing only what you actually need at the higher rate rather than defaulting to the full 80%.
Smaller corpuses get more flexibility as ₹8 lakh, or less, can be withdrawn entirely with no annuity required, and between ₹8-₹12 lakh you can take up to ₹6 lakh as a lump sum.
Government employees stay on the older 60:40 structure. If you exit before completing 15 years in NPS, before age 60, or before superannuation, this counts as an early exit. In that case, 80% of your corpus must go toward an annuity regardless of size, unless your total corpus is ₹5 lakh or less, in which case the entire amount can be withdrawn. So someone joining at 40 and exiting at 52 would face 80% forced annuitization, a very different outcome from a normal exit at 60 or after 15 years.

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The Compulsory Annuity Rule and What It Means for Your Pension

Whatever portion gets annuitized has to buy a pension plan from an IRDAI-approved insurer, and the annuity income is taxed at your slab rate every year, for life. This draws the most criticism as you're handing over savings for a return usually lower (5.5%-6.5%) than what the equity allocation delivered while still invested.

The upside is that this mandatory portion shrank from 40% to 20% for most subscribers in December 2025, meaningfully increasing the share of your corpus you control at retirement.

National Pension Scheme Benefits: Tax Treatment Under Old and New Regimes

Section 80CCD(1) (Now Section 124 Under the Income Tax Act 2025): Your own contribution, deductible up to the combined ₹1.5 lakh limit shared with Section 123 (old 80C). Old regime only.
Section 80CCD(1B) (Also Under Section 124): An extra ₹50,000 deduction, separate from the ₹1.5 lakh limit above, the single most underused NPS benefit since it exists nowhere else. Old regime only.
Section 80CCD(2): Employer contributions are deductible up to 10% of salary in the private sector, 14% for government employees or anyone under the new regime. This is one of the few deductions that survives under the new regime and has no separate rupee cap of its own, though employer contributions to Employees Provident Fund, NPS, and superannuation combined become taxable above ₹7.5 lakh a year.

National Pension Scheme Versus PPF, EPF/VPF, and Equity Mutual Funds

NPS, Public Provident Fund (PPF), Employees Provident Fund (EPF)/Voluntary Provident Fund (VPF), and equity mutual funds all serve retirement in different ways.

PPF is EEE, short for Exempt-Exempt-Exempt, which means it is fully tax-free and guaranteed. NPS is EET, short for Exempt-Exempt-Taxed, which means it is exempt from taxes going in and while it grows, but the annuity income you eventually receive gets taxed.
EPF/VPF sits closer to PPF, tax-free if you stay within the contribution limit, but only accessible if you're salaried.
Equity mutual funds sit apart entirely, no lock-in, no NPS-style deduction, but full liquidity and no forced annuitization.

Factor	NPS	PPF	EPF/VPF	Equity Mutual Funds
Returns	Market-linked, up to 75% equity	Fixed, 7.1% currently	8.25 (FY25-26)	Market-linked, no cap
Tax Structure	EET (annuity taxed)	EEE (fully tax-free)	Tax-free up to ₹2.5 lakh contribution per year	Long-Term Capital Gains taxed above ₹1.25 lakh per year at 12.5%
Lock-in	Till 60, partial exit rules apply	15 years	Till retirement or job change	None (except Equity Linked Savings Scheme)
Extra tax deduction	₹50,000 under section 124	None beyond the ₹1.5 lakh cap	None beyond the ₹1.5 lakh cap	None

For most people, this isn't an either-or situation.

NPS works well as the tax-advantaged, disciplined core of retirement savings. On the other hand, equity mutual funds add growth and liquidity on top of that.

You can choose either PPF or EPF/VPF to cover the guaranteed debt allocation alongside both NPS and equity mutual funds. If you're salaried and have access to EPF/VPF, it's generally the better choice since it currently pays a higher rate. If you don't have that access, PPF is the right alternative for the same role in your portfolio.

National Pension Scheme Calculator and Corpus Chart by Age and Contribution

Illustrative only, assuming a 10% average annual return (a reasonable long-term estimate for a 75% equity allocation, not a guarantee) until age 60. You can use this national pension scheme chart as a rough starting point:

Starting Age	Monthly Contribution	Approx. Corpus at 60
25	₹5,000	₹1.9 crore
30	₹10,000	₹2.26 crore
40	₹15,000	₹1.14 crore

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Conclusion

NPS's combination of very low charges, real equity exposure, and a tax deduction available nowhere else makes it one of the best retirement tools in India, especially after the December 2025 reforms loosened the old annuity requirements. However, it works best as one part of a three-part plan, not a standalone solution.

Term insurance for protection, health insurance for medical emergencies, and NPS for retirement. If you get those three right, most of the heavy lifting in a financial plan is done.

If protection is the piece you haven't sorted yet, that's worth fixing first. Our pension plans guide covers how NPS fits alongside other retirement options in more depth.

Note

Ditto is not a SEBI-registered investment advisor. It is recommended to speak to one before making any investment decisions.

Frequently Asked Questions

Is the National Pension Scheme a good retirement product for a salaried employee?

Yes, particularly if your employer offers NPS contributions. Employer contributions are deductible under Section 80CCD(2) regardless of which tax regime you're on, which means you get effectively free tax savings added on top of your salary. Combined with the extra ₹50,000 personal deduction and NPS's very low charges, it's hard to find a comparably efficient retirement product for most salaried employees.

Can I withdraw my entire NPS corpus at 60 without buying an annuity?

Only if your accumulated corpus is ₹8 lakh or less, in which case the full amount can be withdrawn with no mandatory annuity. Between ₹8 lakh and ₹12 lakh, you may withdraw up to ₹6 lakh as a lump sum, with the balance available through systematic unit redemption over at least six years, or through an annuity instead. Above ₹12 lakh, at least 20% must go toward an annuity purchase under the current rules for non-government subscribers, following the December 2025 PFRDA reform that reduced this from the earlier 40%.

How much can I claim under Section 80CCD(1B) for National Pension Scheme contributions?

Up to ₹50,000, entirely separate from and in addition to the ₹1.5 lakh combined limit under Section 80C (now Section 123). This deduction is available only under the old tax regime. If you've opted for the new regime, this ₹50,000 benefit doesn't apply.

When am I allowed to make a partial withdrawal from my NPS Tier 1 account?

After completing at least 3 years in the scheme, and only for specific reasons defined by PFRDA. These include your own or your children's higher education, your own or your children's marriage, purchase or construction of your first residential house or flat, treatment of specified critical illnesses for yourself, your spouse, your children, or dependent parents, medical and incidental expenses arising from disability or incapacitation, and skill development or self-employment activities. You're limited to 25% of your own contributions per withdrawal, and a maximum of four withdrawals before age 60, spaced at least four years apart.

Can I change my NPS fund manager or switch from Auto Choice to Active Choice?

Yes. You can switch your pension fund manager once per financial year for Tier I, and change between Active Choice and Auto Choice, or adjust your asset allocation within Active Choice, through your CRA's eNPS portal at any time up to four times in a financial year.

Does the National Pension Scheme still give tax benefits under the new tax regime?

Mostly no, with one significant exception. Your own contributions under Section 80CCD(1) and the extra ₹50,000 under 80CCD(1B) are old-regime-only. Employer contributions under Section 80CCD(2), however, remain deductible under the new regime too, making that specific benefit worth using if it's available to you.

What happens to my National Pension Scheme corpus if I die before 60?

The entire accumulated corpus is paid out to your nominee or legal heir, with no mandatory annuity purchase required for all citizen and corporate subscribers. Your nominee can voluntarily purchase an annuity with the proceeds if they want ongoing income instead of a lump sum, but it isn't compulsory.

What is NPS Vatsalya, and how is it different from a regular NPS account?

NPS Vatsalya is a pension account a parent or guardian opens on behalf of a minor, designed to build a retirement corpus for them from childhood. Contributions get the same, shared ₹50,000 deduction under Section 80CCD(1B) as regular NPS, extended to Vatsalya specifically from April 1, 2026. The account converts into a standard NPS account once the child turns 18.

What is the Multiple Scheme Framework (MSF), and does it change how much equity I can hold?

MSF, live since October 1, 2025, lets you hold and manage multiple NPS schemes under a single PRAN instead of being limited to one scheme per asset class with one fund manager. It also introduced new scheme options that allow up to 100% equity exposure, higher than the 75% cap under the older common schemes, giving subscribers who want it meaningfully more aggressive positioning.

What is NPS Swasthya, and can I use my pension savings for medical expenses?

NPS Swasthya is a pilot scheme launched in January 2026 that lets subscribers open a separate health-linked account under their PRAN and withdraw up to 25% of their own contributions for medical treatment, including hospitalization and outpatient care. There is no minimum contribution required to open the account, but you need an accumulated corpus of at least ₹50,000 before you can make your first medical withdrawal. It pays out directly to hospitals or health administrators. This is currently a trial, not a permanent feature of every NPS account.

How does NPS compare with the Unified Pension Scheme (UPS) for government employees?

UPS, available only to central government employees, guarantees a pension of 50% of your average basic pay over the last 12 months after 25 years of service, with a ₹10,000 minimum monthly pension after just 10 years, regardless of market performance. NPS offers no such guarantee. Your pension depends entirely on investment returns. The contribution structure differs too. Under UPS, the government credits 10% of Basic plus DA to your individual corpus and a further 8.5% into a pooled fund that backs the guarantee, working out to 18.5% overall, against a straightforward 14% credited directly to your own account under NPS. UPS costs the government more in total, but your personal corpus grows more slowly. You're trading corpus growth for a guarantee. Employees who opted for UPS were also given a one-time, one-way facility to switch back to NPS, subject to conditions, though switching from NPS to UPS itself remains a one-time, irrevocable choice.

Last updated on: 9 Aug, 2026