The National Pension System (NPS) is a voluntary, market-linked retirement account regulated by the Pension Fund Regulatory and Development Authority (PFRDA). You contribute during your working years, the money is invested across equity and debt, and at exit a non-government subscriber can take up to 80% as a lump sum while at least 20% must buy a monthly pension (government subscribers: 60% and 40%). Returns are not guaranteed.
That last line is the whole point. NPS is not a fixed-return scheme like a provident fund.
NPS at a glance
What is the National Pension System?
NPS is a government-created retirement scheme, open to almost any Indian resident aged 18 to 70. You open an account, get a Permanent Retirement Account Number (PRAN), and pay into it whenever you like. The money sits in professionally managed funds and compounds until you retire.
It began as the pension system for central government staff and was later opened to everyone, including the self-employed. Unlike a job-linked pension, NPS is portable: the same account follows you across employers, cities and careers.
Tier I vs Tier II: which account does what?
NPS has two accounts, and mixing them up is the most common confusion.
- Tier I is the actual retirement account. Early access is limited by rule (partial withdrawals only for specified needs), it comes with the tax deductions NPS is known for, and enforces the lump-sum-plus-annuity rule at the end. You cannot casually dip into it.
- Tier II is an optional, no-lock-in account that behaves like a flexible savings pot. You can withdraw from it anytime. It carries no exit rules, but for most subscribers it also carries no special tax benefit, so it is closer to an ordinary investment account than a pension.
You need an active Tier I account before you can open Tier II. Most people who use NPS for retirement live almost entirely inside Tier I.
How is your NPS money invested?
Your contributions are split across asset classes: equity (E), corporate debt (C), government bonds (G) and a small alternative-assets sleeve (A). You choose how the money is spread in one of two ways.
- Active Choice lets you set your own mix, with equity capped at a percentage that tapers as you age.
- Auto Choice runs a lifecycle model that automatically shifts you from equity toward bonds as you get older, reducing risk near retirement.
A set of PFRDA-appointed pension fund managers actually run the money, and you pick one. No single manager is guaranteed to outperform, and you can switch. Because a portion sits in equity, the value moves with the market, which is exactly why the final corpus is not fixed. To see how the deductions work across these contributions, read the NPS tax benefits guide.
What happens to NPS at age 60?
This is the rule that defines NPS, and it changed in December 2025. At normal exit (60, or after 15 years in the scheme if that comes first, and deferrable to 85), a non-government subscriber's Tier I corpus is split:
- Up to 80% can be withdrawn as a lump sum. Only 60% of the corpus is tax-free, though: the tax exemption was not raised with the withdrawal limit, so the slice between 60% and 80% is taxed at your slab.
- At least 20% must be used to buy an annuity, a floor set by the PFRDA's exit regulations – the annuity itself is a product from an IRDAI-regulated life insurer that pays you a regular pension for life.
Government subscribers keep the earlier split: up to 60% as a lump sum and at least 40% into an annuity.
How a non-government Tier I corpus splits at exit
Up to 80% as a lump sum (60% of the corpus tax-free); at least 20% must buy an annuity. A corpus of ₹8 lakh or less can be taken in full.
If the total corpus is small (₹8 lakh or less since the December 2025 amendment), you can withdraw the whole amount and skip the annuity; between ₹8 lakh and ₹12 lakh, up to ₹6 lakh can come out as a lump sum. The pension you eventually receive depends on annuity rates at that time and is taxed as income in the year you receive it. You choose the annuity provider and the pension format from an approved list, but the scheme never names one as best. The full exit rules, including partial and premature withdrawals, are in NPS withdrawal rules.
Who does NPS suit, structurally?
NPS is built for people who want a disciplined, low-cost, long-horizon retirement account and are comfortable with market-linked growth in exchange for a mandatory pension at the end, now a smaller one. The forced annuity is a feature for anyone who worries about outliving their savings, and a constraint for anyone who wants full control of the corpus.
It sits differently from a fixed-rate scheme like PPF, where the whole maturity value is yours and tax-free. That structural difference is worth understanding before you decide, and the PPF vs NPS comparison lays it out side by side.
Related nyvo guides
- NPS Tax Benefits: 80CCD(1), (1B) and (2) – the three deductions NPS opens up and which survive the new regime.
- PPF vs NPS: How to Choose – fixed government rate against market-linked growth, compared structure by structure.
- Atal Pension Yojana (APY): How It Works – the government-guaranteed pension scheme for smaller, fixed payouts.
NPS is best read as two decisions in one: how to grow the money now, and how to draw it later. The growth is market-linked and yours to shape; the drawdown is part lump sum, part lifelong pension, and largely fixed by rule. Understand both halves before you open a PRAN.
