Lesson 2 of 8 · Pension & Retirement Planning

National Pension System (NPS) — Structure, Fund Choices & Tax Benefits

How the National Pension System is built, who does what in it, the exit rules in force since December 2025 for non-government and government subscribers, and the income-tax treatment of contributions and withdrawals under the Income-tax Act, 2025.

Fact-checked 8 October 20264 practice questions in the game

What the NPS is

The National Pension System (NPS) is a defined-contribution retirement scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Defined-contribution means that what goes in is known, while the pension depends on the contributions made and what they earn. The NPS began in 2004 for government employees and was opened to all citizens in 2009.

Each subscriber has one Permanent Retirement Account Number (PRAN). Tier-I is the pension account, with limited partial withdrawals and exit at vesting. Tier-II is a voluntary account that can be withdrawn freely.

Who does what

A Central Recordkeeping Agency maintains each subscriber's account, processes transactions and issues the PRAN. Points of Presence register and serve subscribers. Pension funds invest the contributions. Annuity Service Providers, which are life insurers, pay the pension bought at exit.

Exit rules since December 2025

PFRDA amended the exit rules in December 2025, and the answer now depends on the kind of subscriber. A non-government subscriber vests after 15 years or at age 60 and may stay invested up to age 85 (earlier 70). On normal exit with a corpus above ₹12 lakh, up to 80% may be taken as a lump sum and at least 20% must buy an annuity; older material quotes 60/40. With a corpus of ₹8 lakh to ₹12 lakh, ₹6 lakh may be taken as a lump sum and the rest is taken through unit redemption spread over six years or more, or as an annuity. Up to ₹8 lakh, the whole corpus may be withdrawn.

On premature exit, a non-government subscriber must use at least 80% of the corpus to buy an annuity and may take 20% as a lump sum; a corpus of ₹5 lakh or less can be withdrawn in full. Partial withdrawals are now allowed four times (earlier three). Government subscribers remain on the 60/40 rule: up to 60% as a lump sum and at least 40% for an annuity.

Tax on contributions and on exit

A subscriber's own contribution, up to 10% of salary or 20% of gross total income, whichever limit applies to that subscriber, is one of the Schedule XV items that share the ₹1.5 lakh deduction of section 123 of the Income-tax Act, 2025. Section 124(3) (old section 80CCD(1B)) allows a further ₹50,000 over and above that limit. Both are available only under the old tax regime.

An employer's contribution is deductible under section 124(2) (old section 80CCD(2)) up to 14% of salary for a Central or State Government employer and 10% for other employers; under the new regime the 14% limit applies to all employers.

On exit, Schedule II of the Act excludes 60% of the corpus from tax. PFRDA now permits a lump sum of up to 80% for non-government subscribers, but the tax wording still refers to 60%, so the slice between 60% and 80% cannot be assumed to be tax-free. The annuity is fully taxable as it is received.

Two related schemes

NPS Vatsalya, launched on 18 September 2024, is an account for a minor under 18, opened with ₹250 and needing ₹250 a year; a parent's contribution qualifies under section 124(4) for the same ₹50,000 deduction, with a combined limit of ₹50,000, under the old regime. The Unified Pension Scheme, from 1 April 2025, is for central government employees under the NPS and assures a pension of 50% of the average basic pay of the last 12 months after 25 years of service.

Rules at a glance

Normal exit, non-government, corpus above ₹12 lakhUp to 80% lump sum; at least 20% annuityPFRDA exit regulations as amended in December 2025; earlier 60/40

Normal exit, non-government, corpus up to ₹12 lakhUp to ₹8 lakh: full lump sum. ₹8 lakh to ₹12 lakh: ₹6 lakh lump sum, rest by unit redemption over six years or more, or annuitySame amendment

Premature exit, non-governmentAt least 80% annuity; full withdrawal if corpus is ₹5 lakh or lessSame amendment

Government subscribersUp to 60% lump sum; at least 40% annuityUnchanged by the December 2025 amendment

Extra deduction for own contribution₹50,000 a yearIncome-tax Act, 2025, section 124(3) (old 80CCD(1B)); old regime only

Tax exclusion on exit60% of the corpusIncome-tax Act, 2025, Schedule II

Illustration

Same corpus, different subscribers

Illustration: Farida, who runs her own design studio, and Mohan, a State Government employee, both reach 60 with an NPS corpus above ₹12 lakh. Farida, a non-government subscriber, may take up to 80% as a lump sum; Mohan, a government subscriber, stays on 60/40. A question about the NPS lump sum has no single answer until the kind of subscriber is known.

Worked example

Splitting a corpus at exit

Assumption, for arithmetic only: a corpus of ₹50,00,000 at exit.
Non-government, normal exit: maximum lump sum = 80% × ₹50,00,000 = ₹40,00,000; minimum annuity purchase = 20% × ₹50,00,000 = ₹10,00,000.
Tax wording: 60% × ₹50,00,000 = ₹30,00,000 is excluded by Schedule II. The remaining ₹40,00,000 − ₹30,00,000 = ₹10,00,000 of the lump sum is not covered by that wording.
Government subscriber: maximum lump sum = 60% × ₹50,00,000 = ₹30,00,000; minimum annuity purchase = ₹20,00,000.
Non-government, premature exit: minimum annuity purchase = 80% × ₹50,00,000 = ₹40,00,000; lump sum = ₹10,00,000.

Result. On ₹50,00,000 the lump sum can be up to ₹40,00,000 (non-government, normal exit), ₹30,00,000 (government) or ₹10,00,000 (non-government, premature exit). Only ₹30,00,000 is covered by the 60% tax exclusion; how the remaining ₹10,00,000 of a ₹40,00,000 lump sum is taxed is not settled by that wording.

Key points

The Central Recordkeeping Agency keeps the accounts and issues the PRAN; pension funds invest; life insurers pay the annuity.
Non-government subscribers with a corpus above ₹12 lakh may take up to 80% as a lump sum on normal exit; government subscribers remain at 60%.
On premature exit a non-government subscriber must put at least 80% into an annuity, unless the corpus is ₹5 lakh or less.
Section 124(3) allows an extra ₹50,000 deduction for own contributions, under the old regime only.
The tax exclusion on exit is worded for 60% of the corpus.

Common misunderstandings

The 80% lump sum does not apply to every subscriber: it is for non-government subscribers with a corpus above ₹12 lakh, and government subscribers remain at 60%.
The 20% and the 80% annuity figures are not interchangeable: 20% is the minimum on normal exit, 80% the minimum on premature exit.
A lump sum that PFRDA permits is not automatically tax-free: Schedule II excludes 60% of the corpus.

Questions people ask

Who issues the PRAN?

The Central Recordkeeping Agency, which also maintains the account and processes transactions.

Can a Tier-II account be withdrawn at any time?

Yes. Tier-II is a voluntary account that can be withdrawn freely; Tier-I is the pension account with restricted withdrawals.

How much must a government subscriber put into an annuity on superannuation?

At least 40% of the corpus, leaving aside the special rule for small balances.

What this lesson relies on

PFRDA regulations on exits and withdrawals under the National Pension System, as amended in December 2025
PFRDA scheme pages on NPS Vatsalya and the Unified Pension Scheme
Income-tax Act, 2025 — sections 123, 124(2), 124(3), 124(4) and 202; Schedule II, Schedule III and Schedule XV
Income-tax Act, 1961 (replaced from 1 April 2026) — sections 80CCD(1B) and 80CCD(2), for the old numbering

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.