How NPS Builds Your Retirement Corpus
The National Pension System (NPS) is a government-regulated retirement scheme supervised by the PFRDA. It combines market-linked equity exposure with fixed-income products, letting you build a sizeable retirement fund by age 60 while choosing your own risk allocation between equity, corporate bonds, and government securities.
Upon reaching age 60, you can withdraw up to 60% of your accumulated corpus completely tax-free as a lump sum. The remaining 40% (minimum) must be used to purchase an annuity plan, which then pays you a regular monthly pension for the rest of your life.
A Worked Example
Investing ₹5,000/month from age 30 to 60 (30 years) at an assumed 10% blended return builds a total corpus of approximately ₹1,13,90,000. At withdrawal, you can take ₹68,34,000 (60%) as a tax-free lump sum, while the remaining ₹45,56,000 (40%) is locked into an annuity — generating an estimated monthly pension of roughly ₹22,800 at a typical 6% annuity yield.
The Extra Tax Benefit Most People Miss
Beyond the standard ₹1.5 lakh Section 80C limit, NPS offers an exclusive additional deduction of up to ₹50,000 under Section 80CCD(1B) — available only under the Old Tax Regime. This means a taxpayer in the 30% bracket can save an extra ₹15,600 in tax (including cess) purely by contributing ₹50,000/year to NPS, on top of whatever they've already invested through other 80C instruments.
NPS vs EPF vs PPF — How They Differ
EPF is largely fixed-income with guaranteed returns and full liquidity at retirement. PPF is 100% government-backed fixed income with complete tax-free status (EEE) but a long 15-year lock-in. NPS sits between them — offering potentially higher returns through equity exposure, but with the trade-off that 40% of your corpus gets locked into a mandatory annuity rather than being fully accessible as cash, and the lump sum withdrawal, while tax-free, isn't as liquid or flexible as EPF.
Choosing Your Asset Allocation
NPS lets you choose your equity allocation (up to 75% under the Active Choice option, reducing automatically as you age under Auto Choice). Younger investors with a long time horizon to retirement typically benefit from a higher equity allocation for better long-term growth, gradually shifting toward safer fixed-income assets as retirement approaches to protect the accumulated corpus from market volatility.