National Pension System (NPS): How It Works, Tax Benefits, Withdrawal Rules and How to Join

The National Pension System (NPS) is a government-regulated retirement savings scheme. You invest regularly during your working life, the money is invested in funds, and when you retire you receive a lump sum and a monthly pension. It is run by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to any Indian citizen aged 18 to 70.

The key points

• Returns are market-linked, not fixed. They are not guaranteed.
• You get a PRAN (Permanent Retirement Account Number) that stays with you if you change jobs.
• The Tier I account is the retirement account with a lock-in. Tier II is an optional account you can withdraw from any time.
• Tier I needs at least ₹500 per contribution and ₹1,000 in a financial year to stay active. There is no upper limit.
• Tax benefits depend on your tax regime. An employer’s contribution is tax-free under both regimes within limits.

Tier I and Tier II

Feature	Tier I	Tier II
Purpose	Retirement savings	Flexible savings
Withdrawals	Locked until exit, with limited partial withdrawals	Any time
Opening	Compulsory	Optional, needs an active Tier I
Tax benefit	Yes, as explained below	No special benefit for most people

Where is the money invested?

You pick a pension fund manager and decide how to split your money across asset classes:

• E: equity (shares)
• C: corporate bonds
• G: government securities
• A: alternative assets, with a small limit

You can choose Active choice and set the split yourself, or Auto choice, where the share of equity reduces automatically as you grow older. If you are not sure, Auto choice is the simpler option. Younger investors usually keep more in equity and move towards safer assets near retirement, but the right mix depends on your own situation.

What could ₹5,000 a month become?

This is an illustration, not a promise. It assumes ₹5,000 invested every month for 25 years (₹15 lakh in total) at a steady yearly return.

Assumed yearly return	Approximate corpus after 25 years
8%	about ₹47.9 lakh
10%	about ₹66.9 lakh
12%	about ₹94.9 lakh

Tax benefits of NPS

Benefit	Old tax regime	New tax regime
Your own contribution (Section 80CCD(1)), within the overall ₹1.5 lakh limit shared with 80C	Yes	No
Extra ₹50,000 for your own contribution (Section 80CCD(1B))	Yes	No
Employer’s contribution (Section 80CCD(2))	Up to 10% of basic salary plus DA for private employees; 14% for government employees	Up to 14% of basic salary plus DA

The Income-tax Act, 2025 came into force on 1 April 2026 and renumbered the sections, so you may see different section numbers on newer forms and portals. The benefits above are described by their familiar names. When you file your return, check the current section on the income tax portal or with a tax professional.

Rules for taking your money out

PFRDA changed the exit rules in late 2025. The main points for Tier I are below.

At normal exit (retirement)

• If you joined before 60, normal exit is at age 60 or after 15 years of NPS, whichever is earlier. You can stay invested and delay the lump sum, the annuity or both until age 85, without making further contributions.
• Non-government subscribers: corpus up to ₹8 lakh can be taken fully as a lump sum. For a larger corpus you can take up to 80% as a lump sum and must put at least 20% into an annuity (a regular pension from an insurer). A middle option exists for corpus between ₹8 lakh and ₹12 lakh.
• Government subscribers: up to 60% lump sum and at least 40% annuity for a corpus above ₹12 lakh.

Leaving early (premature exit)

• If your corpus is up to ₹5 lakh, you can withdraw all of it.
• If it is more than ₹5 lakh, you can take up to 20% as a lump sum, and at least 80% must go to an annuity.

Partial withdrawal while you continue

• Allowed after 3 years in NPS.
• Up to 25% of your own contributions (not the gains), up to 4 times before age 60, with at least a 4-year gap between withdrawals.
• Allowed only for stated reasons: your children’s higher education or marriage, buying or building a home, medical treatment, disability expenses, or settling a loan secured on the NPS account.

If the subscriber dies

For non-government subscribers the whole corpus goes to the nominee or legal heir. This is why it is important to add a nominee to your account.

Tax when you withdraw

• Up to 60% of the corpus taken at exit is tax-free.
• The money used to buy an annuity is not taxed at that time. The pension you receive every month is taxed at your slab rate.
• Although up to 80% can now be taken as a lump sum by non-government subscribers, the tax-free limit has been described as 60%. Check the latest treatment of the extra portion with a tax professional before you exit.

How to open an NPS account

You need your PAN, Aadhaar (or other KYC), a bank account, a photo and a signature. Keep your mobile number linked to Aadhaar for e-KYC.

1. Open the official eNPS website or go to a bank or other authorised point of presence. Choose “Register” and select the All Citizen model.
2. Complete KYC with Aadhaar OTP or DigiLocker.
3. Pick a pension fund manager and the investment choice (Auto or Active).
4. Add a nominee, upload your signature and make the first payment.
5. Your PRAN is generated. Save it and set up online access.

If your employer offers NPS, ask your HR team. Government and many private employers deduct and deposit the contribution for you. If you are a central government employee, you can also choose between NPS and the Unified Pension Scheme (UPS), which has its own rules. Parents can open an NPS Vatsalya account for a child.

Who should think twice?

• If you may need the money in the next few years, the lock-in will be a problem.
• If you are in the new tax regime and not getting an employer contribution, there is no tax deduction for your own contribution.
• If you cannot accept market ups and downs, NPS returns will vary every year.

Sources

• Pension Fund Regulatory and Development Authority (PFRDA)
• Finnovate: NPS withdrawal rules
• Zerodha Varsity: NPS tax rules and benefits
• Protean: NPS under old and new tax regime

Last checked: 27 October 2026. NPS and tax rules change often, so confirm the latest details with PFRDA, the NPS Trust or a tax professional before you act. This guide is general information, not financial advice, and NPS returns are not guaranteed.