Planning for retirement is easier when you understand how your savings will grow and when you can access them. The National Pension System (NPS) is one of India’s most trusted retirement tools, offering long-term growth, tax benefits and flexibility.
Here’s a clear guide to how it works, how much you might need to invest, and what major changes are coming in 2025.
What Is the National Pension System (NPS)?
NPS is a government-backed retirement savings scheme designed to help individuals build a financial cushion for their post-retirement years. You invest during your working life, your money grows based on chosen asset classes, and at retirement you withdraw part of the corpus and use the rest to receive a monthly pension.
Who Can Join NPS?
Anyone aged 18 to 70 can open an NPS account. It is suitable for salaried employees, self-employed individuals and anyone who wants to save systematically for retirement.
Types of NPS Accounts
Tier I
The primary retirement account with tax benefits. Withdrawals are restricted until retirement.
Tier II
A voluntary savings account that allows flexible withdrawals, but without tax incentives.
How NPS Works
You contribute regularly, starting from as low as ₹500, and your money is invested in equity, corporate bonds, and government securities. Professional fund managers handle these allocations.
At retirement, you may withdraw up to 60% of your total corpus tax-free. The remaining 40% must be used to buy an annuity, which provides a monthly pension.
Example: Building a Retirement Corpus
If you invest ₹2,000 per month from age 25 and earn an average return of 10%:
- Total investment: ₹8.4 lakh
- Corpus at 60: ~₹76 lakh
- 60% lump sum: ₹45.6 lakh
- 40% annuity: ₹30.4 lakh, which then pays your pension
Benefits of NPS
- Tax savings: Deductions under Section 80C and an extra ₹50,000 under Section 80CCD(1B).
- Low costs: One of the most cost-efficient retirement products.
- Customisation: Choose your fund manager and asset allocation.
- Regulated: Overseen by the PFRDA.
What 100% Equity Allocation Means
Higher Growth Potential
Equities tend to outperform bonds over long periods. As per NPS Trust data, equity pension funds from HDFC, ICICI and UTI delivered over 12% average annual returns across five and ten years. Bond funds delivered around 7.5%-9%, and government securities around 9%.
Investing ₹5,000 monthly from age 25 to 60 at 10% returns can grow to over ₹1.9 crore.
Higher Volatility
Equity markets rise and fall sharply. A 100% equity allocation means being comfortable with these fluctuations—especially important for younger investors with long time horizons.
Lock-in and Liquidity
The high-risk 100% equity scheme includes a 15-year lock-in. Switching out is not allowed until completion of this period unless moving to older schemes. Withdrawals of up to 60% remain tax-free only after the lock-in or after age 60.
Changed Withdrawal Rules
On exit, 40% still goes into annuity. Under the Multiple Scheme Framework (MSF), you can exit after 15 years or at age 60 while keeping the 60% tax-free withdrawal benefit. Previously, early exits required annuitising 80%.
Is 100% Equity Right for You?
Good For
- Young investors in their 20s or early 30s
- Gig workers or self-employed individuals without employer pension benefits
- Investors holding other low-risk assets such as PF or fixed deposits
Be Cautious If
- You’re 50+ and nearing retirement
- You dislike market volatility
- You lack an emergency fund (NPS Tier I is not meant for short-term needs)
How to Decide Your Allocation
- Assess your risk appetite and time horizon.
- Review long-term fund performance.
- Diversify outside NPS with low-risk instruments.
- Understand lock-in rules and associated charges.
- Track PFRDA updates regularly.
Major Changes Coming From 1 October 2025
100% Equity for Non-Government Subscribers
From this date, non-government members may invest their entire NPS contribution in equities under the MSF. This boosts growth potential but raises risk.
What Is the Multiple Scheme Framework (MSF)?
Earlier, subscribers could hold only one scheme under a single PRAN. Under the MSF, you may now run multiple schemes through different CRAs, offering greater flexibility and choice.
Proposed Changes to Exit and Withdrawal Rules
The PFRDA has suggested the following:
Exit After 15 Years
Non-government subscribers may exit NPS after completing 15 years, instead of waiting until age 60.
Higher Lump Sum and Easier Partial Withdrawals
Proposed rules allow smoother access to funds for major expenses such as medical treatment, education, and home construction.
Recent Changes: UPS and NPS Improvements
The Unified Pension Scheme (UPS), introduced for central government employees (excluding armed forces), saw low participation. To address this, the government introduced a one-time switch option allowing UPS members to return to NPS.
How Much to Invest for a ₹1 Lakh Monthly Pension?
For a subscriber starting at age 30:
- Monthly investment: ₹30,000
- Investment period: 30 years
- Total invested: ₹72 lakh
- Corpus at 10% return: ₹4.56 crore
- Annuity (40%): ₹1.82 crore
- Lump sum (60%): ₹2.74 crore
- Estimated pension: ₹1 lakh per month (at 6% annuity return)
Tax Benefits
- Deduction under Section 80CCD(1) within the overall limit of ₹1.5 lakh
- Additional ₹50,000 under Section 80CCD(1B) for Tier I contributions