What NPS is, and what it is not
The National Pension System is a retirement account regulated by PFRDA. You contribute monthly, the money is invested across equity, corporate bonds and government securities, and at 60 it converts into a mix of cash and a lifelong pension.
It is not a mutual fund with a tax break. The defining feature is the lock: your money is meant to stay until 60, and a chunk of it is meant to become an annuity whether you want one or not.
What happens at 60
- Up to 60% can be withdrawn as a lump sum — entirely tax-free.
- At least 40% must buy an annuity from an insurer, which pays you monthly for life.
- If the total corpus is ₹5 lakh or less, you may take all of it.
That 40% is the part people underestimate. You do not choose whether to annuitise; you only choose how much beyond the minimum.
The tax detail that surprises people
Contributions get deductions. The lump sum at 60 is tax-free. But the pension is taxed at your slab, every year, as it arrives.
So NPS is not a tax-free retirement vehicle — it is a tax-deferred one. You save tax at 30% while earning and pay tax on the pension later, possibly at a lower slab if your retirement income is modest. Whether that trade is good depends on your bracket now versus then.
The deductions, and which regime they survive in
| Section | Amount | Available in new regime? |
|---|---|---|
| 80CCD(1) — your contribution | Within the ₹1.5L 80C limit | No |
| 80CCD(1B) — extra | ₹50,000 over and above 80C | No |
| 80CCD(2) — employer's | Up to 14% of Basic (govt) / 10% (private) | Yes |
The famous ₹50,000 extra deduction exists only in the old regime. If you have moved to the new regime, the main NPS tax case left standing is the employer contribution under 80CCD(2) — which is genuinely valuable and often overlooked in salary negotiations.
Returns, honestly
NPS caps equity exposure (75% until 50 under active choice, tapering after), so long-run returns have historically landed between debt funds and pure equity. That cap is a feature for a pension product, not a flaw — but it means NPS should be compared against a balanced portfolio, not against a small-cap fund.
The annuity rate at the end is whatever insurers quote on the day you buy. Recent rates have hovered around 6%. Treat any projected pension, including the one above, as an illustration.