NPS Explained
The short version
The National Pension System is a retirement account regulated by PFRDA. You (and often your employer) put money in, professional fund managers invest it in shares and bonds at very low cost, and at 60 you take most of it as cash and use the rest to buy a monthly pension.
Returns
not guaranteed
Join at
any Indian citizen
Extra tax cut
over 80C, old regime
At 60
as cash, rest pension
The 80% cash rule is for non-government subscribers under PFRDA’s December 2025 exit rules. Government employees keep 60% cash and 40% pension.
Step by step
How NPS works
- 01
Open a PRAN
Your Permanent Retirement Account Number, opened online in minutes with Aadhaar and PAN, or through a bank or your employer.
- 02
Contribute when you like
Monthly, yearly or whenever. Your employer can add to it too. Tier I is the locked retirement account; Tier II is an optional, withdrawable add-on.
- 03
It is invested for you
Pick a fund manager and a mix of equity (E), corporate bonds (C), government bonds (G) and alternatives (A), or let Auto choice lower your equity as you age.
- 04
At 60: cash + pension
Take most of the corpus as a lump sum and put the rest into an annuity that pays you every month for life.
See it
Play with the numbers
Move the sliders and tap the chips. Everything recalculates as you go, using the scheme’s own rules.
From your salary to your pension
You (+ employer)
contribute any time
Your PRAN
Tier I, locked till 60
Fund manager
you pick one
E · C · G · A
shares, bonds, gilts
At 60
cash + monthly pension
Equity falls as you get older
At 30, about 75% in shares, the rest in bonds. Full equity holds until 35, then steps down each year until 55.
An illustration of PFRDA’s lifecycle funds. Prefer to choose yourself? Active choice lets you set the mix within PFRDA’s limits.
The extra ₹50,000 deduction
The ₹1.5 lakh under 80C is shared with PPF, EPF, ELSS and insurance. The blue ₹50,000 under 80CCD(1B) is only for NPS, on top. Your employer’s NPS contribution is a third, separate deduction.
including 4% cess
What you might have at 60
Returns are assumptions, not promises; NPS has no guaranteed return. Annuity rates depend on the insurer and the plan you buy.
over 30 years
Above ₹12 lakh: up to 80% as cash, at least 20% buys an annuity.
from the 20% at 6%
60% of the corpus
Starting 5 years later, at 35, would leave you about ₹47.1L less at the same 10% return.
Key rules
The rules that matter
Who can join
including NRIs
Tier I lock
partial withdrawals for set needs
Returns
depend on your mix
Cost
fund fees are a fraction of a percent
Partial withdrawal
up to 25% of your own contributions
Exit before 60
only a small part as cash
Tax
How it’s taxed
NPS gives the biggest deduction of any retirement product, but the way out is only partly tax-free.
Put in: 80C up to ₹1.5L plus an extra ₹50,000 under 80CCD(1B) in the old regime. Your employer’s share (80CCD(2)) is deductible in both regimes.
Grows: Gains inside the account are not taxed while it grows.
Take out: 60% of the corpus is tax-free as a lump sum. The monthly pension is taxed as income.
On the new tax regime only your employer’s contribution (up to 14% of basic + DA) is deductible. Check how a lump sum above 60% is taxed before you withdraw.
Is it for you
Who it suits
A good fit if
- You are saving for retirement and can leave the money until 60.
- You are on the old tax regime and want the extra ₹50,000 deduction.
- Your employer offers to contribute: that money is deductible even on the new regime.
- You want low-cost market exposure without picking funds yourself.
Think twice if
- !You want a guaranteed amount: returns move with markets.
- !You may need the money before 60: early exit pushes most of it into a pension.
- !You dislike annuities: at least 20% of a large corpus must buy one.
Avoid these
Common mistakes
Leaving equity at the default
Auto choice and the active mix decide most of your return. A young saver in a very conservative mix may end up with far less.
Forgetting the extra ₹50,000
The 80CCD(1B) deduction is separate from 80C. On the old regime, ₹50,000 more in NPS cuts tax by up to ₹15,600 a year in the 30% slab.
Ignoring employer NPS
Many employers can route part of your salary into NPS. That part is deductible even on the new regime.
Expecting all of it as cash
Above a ₹12 lakh corpus, at least 20% must buy an annuity, and the pension it pays is taxable.
Compare
NPS next to other retirement options
NPS
Atal Pension is open only to people aged 18 to 40 who don’t pay income tax.
How to open
How to open NPS
- 1
Go to eNPS
Open the eNPS site of a central record-keeping agency (Protean, KFintech or CAMS) or your bank’s NPS page.
- 2
Verify and choose
Verify with Aadhaar or PAN, then pick a fund manager and Auto or Active choice.
- 3
Make the first contribution
Pay online. You get a PRAN, which stays with you across jobs and cities.
Documents you’ll need
- PAN
- Aadhaar (for online KYC)
- Bank account details
- Photo and signature (uploaded)
- Nominee details
You open NPS online with a central record-keeping agency, through a bank, or through your employer. Truely Money does not take applications.
FAQ
Questions people ask
Are NPS returns guaranteed?
No. They depend on how your money is split between shares and bonds and on how markets do. Over long periods equity-heavy mixes have done better, with bigger ups and downs along the way.
How much can I take as cash at 60?
Under PFRDA’s December 2025 rules, a non-government subscriber with a corpus above ₹12 lakh can take up to 80% as cash and must use at least 20% for an annuity. Up to ₹8 lakh can all be taken as cash, and between ₹8 and ₹12 lakh up to ₹6 lakh as cash with the rest paid out over time. Government employees keep the 60:40 split.
Can I withdraw before 60?
After 3 years you can make a few partial withdrawals of up to 25% of your own contributions for things like a child’s education, a home or illness. Leaving NPS fully before 60 means most of the corpus must buy a pension.
What is the difference between Tier I and Tier II?
Tier I is the retirement account with the tax benefits and the lock. Tier II is an optional savings account on the same PRAN that you can withdraw from any time, without the tax benefits for most people.
Is the pension taxable?
Yes. The monthly annuity is added to your income and taxed at your slab.
What if I change jobs?
Nothing changes. Your PRAN is portable, and a new employer can contribute to the same account.
Go further
Related tools and guides
Checked against official sources on 21 Oct 2026. Government rates and rules change, so confirm the latest on the official site before you act. This page explains how the scheme works and is not personal financial advice. Truely Money is independent, is not affiliated with PFRDA or any government body, and does not take applications.