National Pension System (NPS): Features, Eligibility, Tax Benefits and Withdrawal Rules

Key Features of NPS

Who Can Join NPS?

Under the current PFRDA All Citizen Model, an individual may voluntarily subscribe if the person is an Indian citizen (resident or non-resident) or an Overseas Citizen of India (OCI), is aged 18 to 85 years, and complies with KYC requirements.

Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible under the All Citizen Model. NPS is an individual account; the applicant must be legally competent to contract.

A person may generally subscribe to NPS even while participating in EPF, PPF, superannuation or another retirement arrangement, subject to the rules of those schemes.

Types of NPS Accounts

Tier I is the core pension account. Tier II provides greater liquidity but should not be confused with the pension account itself.

NPS Investment Choices

Active Choice

Under Active Choice in the All Citizen model, subscribers can allocate contributions among permitted asset classes. PFRDA currently permits up to 75% in Equity (E), up to 100% in Corporate Bonds (C), up to 100% in Government Securities (G) and up to 5% in Alternative Investment Funds (A), subject to the total allocation not exceeding 100% and any applicable age/model conditions.

Auto Choice

Auto Choice uses life-cycle funds in which the asset mix changes with the subscriber's age. PFRDA provides multiple life-cycle choices designed for different risk profiles.

Multiple Scheme Framework

PFRDA has introduced a Multiple Scheme Framework for eligible non-government-sector subscribers, allowing investment across approved schemes under the same PRAN in accordance with the current framework.

NPS Tax Benefits in 2026

From 1 April 2026, the Income-tax Act, 2025 is the operative income-tax statute for the tax year 2026-27 onward. The familiar NPS provisions of section 80CCD of the Income-tax Act, 1961 have been reorganised, principally under section 124 of the 2025 Act, with related deductions also interacting with section 123 and the relevant Schedules.

Do not confuse Tier I and Tier II tax benefits. The additional ₹50,000 NPS deduction is not a general deduction for ordinary Tier II contributions. Tax deductions depend on the type of contribution, the applicable statutory provision and the tax regime selected.

Tax on NPS withdrawals

• On closure or opting out of NPS, the statutory income-tax exemption is generally available up to 60% of the total amount payable, subject to the applicable provisions.
• Eligible partial withdrawals made in accordance with PFRDA rules can be exempt up to 25% of the subscriber's own contributions, subject to the tax law.
• Amounts used for purchase of an eligible annuity are treated according to the applicable tax provisions; pension/annuity income received later is generally taxable in the recipient's hands.
• Tax treatment on death and special NPS variants can differ; the governing provisions should be checked for the relevant case.

Partial Withdrawal from NPS

PFRDA permits partial withdrawal from Tier I subject to the conditions, purposes, frequency and limits specified in the applicable regulations. The permitted amount is generally linked to the subscriber's own contributions and may not exceed 25% of those contributions for a withdrawal.

Following the 2026 changes, the All Citizen framework provides greater flexibility in the frequency of partial withdrawals. The exact entitlement depends on the subscriber's age, previous withdrawals, applicable intervals, the purpose claimed and the current PFRDA regulations.

Typical permitted purposes include specified education, marriage, housing, medical treatment and other purposes recognised by PFRDA from time to time. Subscribers should verify the current purpose and documentation requirements before applying.

NPS Exit and Retirement Rules

The PFRDA (Exits and Withdrawals under the National Pension System) Regulations, 2015, as amended most recently on 20 July 2026, govern exits and withdrawals. Rules differ between Government and Non-Government models, and special corpus thresholds can provide additional payout options.

All Citizen Model - Normal Exit

For the All Citizen Model, normal exit is linked to the prescribed vesting period or age conditions. Under the current framework, a subscriber may generally take up to 80% as lump sum and must use at least 20% for annuity, subject to corpus-based options and the detailed regulations. Smaller corpus amounts may qualify for full lump-sum or other approved payout options.

Premature Exit

For premature exit, the broad rule continues to require a substantially larger portion of the corpus to be annuitised. In the All Citizen model, the general framework is up to 20% lump sum and at least 80% annuity, subject to special relief for smaller corpus amounts and other regulatory conditions.

Death of Subscriber

On death, payout rules depend on the applicable NPS sector/model and regulations. Nominee/legal-heir options should be verified under the current PFRDA rules before making a claim.

Sectors and Models under NPS

Government Sector

NPS applies to covered Central and State Government employees in accordance with the relevant service rules, notifications and pension framework. Government-sector exit conditions may differ from the All Citizen Model.

Corporate Sector

Employers in the private and public sectors may adopt NPS for employees under the Corporate Model. Eligible employees can receive employer contributions and may be able to claim the corresponding tax deduction subject to the Income-tax Act, 2025.

All Citizen Model

Eligible individuals can voluntarily open and maintain NPS independently of an employer through registered Points of Presence or approved online channels.

How to Open an NPS Account

An eligible applicant can open an NPS account through a PFRDA-registered Point of Presence or an authorised online NPS onboarding platform. KYC, PAN and bank/account verification requirements apply as prescribed.

Before contributing, verify the current charges, minimum contribution requirement, pension fund choice and investment option shown by the authorised platform.