NPS Guide: How National Pension System Works in India (2026)

NPS offers an extra ₹50,000 tax deduction under 80CCD(1B). Learn about asset allocation, fund managers, and the annuity requirement.

1.NPS basics and tax benefits

The National Pension System is a voluntary retirement savings scheme regulated by PFRDA. **Tax benefits**: Up to ₹1.5 lakh under 80C (Tier I), plus an additional ₹50,000 under 80CCD(1B) — giving you a total ₹2 lakh deduction in the old regime. Employer contributions up to 14% of basic+DA are deductible under 80CCD(2) even in the new regime. At maturity (age 60), 60% of the corpus can be withdrawn tax-free and 40% must buy an annuity.

2.Asset allocation: Active vs Auto Choice

NPS invests in four asset classes: **E** (equity, up to 75%), **C** (corporate bonds), **G** (government bonds), **A** (alternative assets, up to 5%). In Active Choice, you pick the allocation. In Auto Choice (Lifecycle Fund), it automatically reduces equity as you age. For someone in their 30s, aggressive lifecycle starts at 75% equity and tapers. Historical NPS equity returns have been 12-14% CAGR since inception — competitive with large-cap mutual funds.

3.Choosing a Pension Fund Manager

Seven PFMs manage NPS funds: SBI, LIC, UTI, HDFC, ICICI, Kotak, and Aditya Birla. Performance varies — **SBI and HDFC** have consistently delivered top-quartile equity returns (13-14% CAGR over 10 years). You can switch PFMs once per year at no cost. The fund management charge is capped at 0.09% — among the lowest in the world for a retirement product.

4.The annuity problem and workaround

The biggest criticism of NPS: at age 60, you must use 40% of your corpus to buy an annuity, which currently offers 6-7% annual payouts — below inflation. On a ₹1 crore NPS corpus, ₹40 lakh buys an annuity paying ₹2.4-2.8 lakh/year (₹20,000-23,000/month). Workaround: build your NPS to the minimum required level and use PPF/ELSS/equity for the remaining retirement corpus, which has no annuity compulsion.

5.Worked example: ₹10,000/month NPS from age 30 to 60

Investing ₹10,000/month with 75% equity allocation earning 12% CAGR: corpus at 60 = **₹3.53 crore**. Tax-free withdrawal (60%) = ₹2.12 crore. Annuity portion (40%) = ₹1.41 crore, generating ₹8,460-9,870/month as pension. Your total annual tax saving (80CCD(1B) at 30% bracket) = ₹15,000/year × 30 years = ₹4.5 lakh saved over the period. Use our NPS calculator to model your specific numbers.