Annuity Rule: At least 40% of your final corpus must be used to purchase an annuity (pension plan). The remaining amount (up to 60%) can be withdrawn as a tax-free lumpsum.
National Pension System (NPS) — How It Works
The National Pension System (NPS) is a voluntary, long-term retirement savings scheme regulated by PFRDA (Pension Fund Regulatory and Development Authority). It's designed to help you build a retirement corpus and provide a regular monthly pension.
Key Features of NPS
- Low Cost: NPS is one of the lowest-cost pension products in the world.
- Flexibility: You can choose your asset allocation across Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A).
- Portability: Your NPS account (PRAN) remains the same even if you change jobs or locations.
NPS Withdrawal Rules at Age 60
When you reach the age of 60, your accumulated corpus is treated as follows:
- Lumpsum Withdrawal: You can withdraw up to 60% of the total corpus entirely tax-free.
- Mandatory Annuity: You must use a minimum of 40% of the corpus to purchase an annuity plan from a Life Insurance company, which will pay you a regular pension. The monthly pension received is taxable as per your income slab.
If your total corpus at age 60 is ₹5 Lakhs or less, you can withdraw the entire 100% as a lump sum.
Tax Benefits of NPS (Tier-I)
NPS is highly popular for its tax efficiency under the Old Tax Regime:
| Section | Benefit Detail | Max Limit |
|---|---|---|
| Section 80CCD(1) | Part of the ₹1.5 Lakh 80C limit. For salaried (10% of basic+DA) or self-employed (20% of gross income). | ₹1.5 Lakhs |
| Section 80CCD(1B) | Exclusive deduction over and above the ₹1.5 Lakh 80C limit. Investing ₹50,000 here saves ₹15,600 in tax in the 30% slab. | ₹50,000 |
| Section 80CCD(2) | Employer contribution (up to 10% of basic+DA, or 14% for Govt employees). Deductible over and above 80C. | 10% of Basic+DA |
Note: Under the New Tax Regime, only the employer contribution under Section 80CCD(2) is available as a deduction. Sections 80CCD(1) and 80CCD(1B) are not applicable.
Tier-I vs Tier-II Accounts
Tier-I is the mandatory retirement account. It has strict withdrawal restrictions and offers tax benefits.
Tier-II is a voluntary investment account. You can withdraw money from Tier-II at any time without penalty, but it offers no tax benefits (except for Central Govt employees with a 3-year lock-in under Section 80C). You must have an active Tier-I account to open a Tier-II account.
Frequently Asked Questions
Common questions about NPS calculation, rules, and withdrawal.
Under current NPS rules, you can withdraw up to 60% of your total retirement corpus as a tax-free lump sum when you reach 60 years of age. The remaining 40% (minimum) must be used to purchase an annuity to provide you with a regular monthly pension.
If you exit NPS prematurely (before age 60), you must use at least 80% of your accumulated corpus to buy an annuity. You can withdraw only a maximum of 20% as a lump sum. However, if your total corpus is less than ₹2.5 Lakhs, you can withdraw the entire 100% amount.
NPS does not offer guaranteed returns as it is a market-linked product. Historically, equity (Scheme E) has delivered 10-14%, corporate bonds (Scheme C) around 8-9%, and government securities (Scheme G) around 7-8%. A balanced portfolio typically yields an expected return of 9-11% over the long term.
Yes, while the 60% lump sum withdrawal at age 60 is completely tax-free, the monthly pension you receive from the annuity (the remaining 40%) is added to your total income in the year of receipt and taxed according to your applicable income tax slab rate.