The National Pension System (NPS) is cheap, professionally managed and comes with tax breaks. Yet for most of its history, salaried Indians have preferred EPF, PPF and mutual fund SIPs. The most common reason people gave was simple: at retirement, NPS forced you to lock 40% of your money into an annuity. In December 2025 PFRDA changed that rule for non-government subscribers. This guide explains what the annuity problem was, what changed, what friction remains, and how NPS now compares.
The Annuity Problem, in One Paragraph
An annuity is a contract with a life insurer: you hand over a lump sum and it pays you a fixed pension for life. Until December 2025, an NPS subscriber exiting normally had to use at least 40% of the corpus to buy one. For many people that felt like losing control of a large part of their savings. The pension is fixed in rupees, so inflation erodes it. It is taxed as income every year. And in most annuity options, the capital is gone once you buy it, unless you pay for a return-of-purchase-price variant that gives a lower pension. Compared with EPF or a mutual fund, where the whole corpus stays yours, this was a hard sell.
What Changed on 19 December 2025
PFRDA amended its exit and withdrawal regulations. The main changes for the non-government sector (All Citizen model and Corporate sector), applying to both the common schemes and the Multiple Scheme Framework:
| Rule | Before | From 19 Dec 2025 |
|---|---|---|
| Annuity at normal exit | At least 40%; up to 60% lump sum | At least 20%; up to 80% lump sum |
| When you can exit normally (All Citizen) | At 60 | After 15 years or at 60, whichever is earlier |
| Small corpus, normal exit | Up to ₹5 lakh: 100% lump sum | Up to ₹8 lakh: 100% lump sum, or systematic lump-sum or unit withdrawals (SLW/SUR) |
| Corpus ₹8–12 lakh | 40% annuity rule applied | Up to ₹6 lakh lump sum, the rest as SUR over at least 6 years or an annuity (or the 80/20 split) |
| Corpus above ₹12 lakh | 60/40 | Up to 80% lump sum, at least 20% annuity |
| Premature exit | Up to 20% lump sum, at least 80% annuity; full withdrawal up to ₹2.5 lakh; 5-year lock-in | Same 20/80 split; full withdrawal up to ₹5 lakh; lock-in removed |
| Entry and exit age | Entry up to 70, exit up to 75 | Both up to 85 |
| Partial withdrawals before 60 | 3 times | 4 times, at least 4 years apart |
| Death before exit | 100% to nominee | 100% to nominee, with option of annuity, SLW or SUR |
Government-sector subscribers still have the 60% lump sum / 40% annuity split at normal exit, although the small-corpus limits (₹8 lakh and ₹8–12 lakh) were raised for them too.
Partial withdrawals remain capped at 25% of your own contributions. Buying or building a first house is now explicitly a one-time withdrawal, medical treatment is no longer limited to a list of illnesses, and withdrawals for start-ups or skill development were removed.
The NPS calculator already applies these rules, so you can see the lump sum and annuity split for your own numbers.
What Still Holds NPS Back
1. Only 60% of the corpus is tax-free
The tax law did not move in step with PFRDA. Under the Income-tax Act, 2025 (Schedule II, serial 6), a payment from the NPS Trust on closure or exit is exempt only up to 60% of the total amount payable. You can now take up to 80% as a lump sum, but the slice between 60% and 80% is added to your income for that year and taxed at your slab rate.
2. Annuity income is fully taxable
Using part of the corpus to buy an annuity is not taxed when you buy it (section 124(9)). But every pension payment is taxed as income at your slab rate (section 124(6)(b)). A mutual fund withdrawal plan, by contrast, is taxed only on the gain portion of each withdrawal.
3. The annuity is fixed while prices rise
At 6% inflation, a fixed pension loses about 44% of its buying power in 10 years and about 83% in 30 years. A long retirement and a level annuity are a poor match unless the rest of your money is invested for growth.
4. Annuity rates depend on the market and your choices
Annuities are bought from PFRDA-empanelled annuity service providers, which are life insurers regulated by IRDAI (not SEBI). The pension you get depends on your age, the provider, interest rates when you buy, and the option you pick (for example, with or without return of the purchase price, or joint life with a spouse). Compare quotes before you choose; the differences between options are large.
5. The tax deduction is now mostly an old-regime benefit
Your own contributions qualify under section 123 (old 80C, within ₹1.5 lakh) and an extra ₹50,000 under section 124(3) (old 80CCD(1B)), but only in the old tax regime. In the new regime, the only NPS deduction is for the employer's contribution: up to 14% of salary (section 124(2)). In the old regime the employer limit is 14% for central and state government employers and 10% for others (section 124(1)).
A Worked Example: ₹1 Crore at Exit
Illustrative only. A non-government subscriber exits with ₹1 crore. We assume an annuity rate of 6% a year; actual quotes vary.
| Old rule (60/40) | New rule, maximum lump sum (80/20) | |
|---|---|---|
| Lump sum | ₹60 lakh, all tax-free | ₹80 lakh: ₹60 lakh tax-free, ₹20 lakh taxable at slab |
| Annuity purchase | ₹40 lakh | ₹20 lakh |
| Pension at 6% (taxable) | ₹2.4 lakh a year | ₹1.2 lakh a year |
If that extra ₹20 lakh is taxed at 30% plus 4% cess, the tax is about ₹6.24 lakh. Taking 80% is therefore not automatically better than taking 60%. Many people will take the tax-free 60%, put 20% into an annuity, and leave the remaining 20% invested in NPS for later systematic withdrawals or a larger annuity. Run your own split in the NPS calculator.
What NPS Does Well
- Cost: from 1 April 2026, investment management fees for non-government subscribers range from 0.04% to 0.12% a year depending on the pension fund's size, plus small CRA and point-of-presence charges. On ₹1 crore that is ₹4,000 to ₹12,000 a year in fund management fees.
- Choice: Active Choice lets you set your own mix of equity (E), corporate bonds (C) and government securities (G). The old alternative-investments scheme (A) has been merged into C and E. Auto Choice moves money from equity to debt as you age. Under the Multiple Scheme Framework, non-government subscribers can choose schemes with up to 100% equity.
- Discipline: limited access before exit keeps money invested for retirement, which is the point.
- Death benefit: if you die before exit, your nominee receives 100% of the corpus.
How NPS Compares Now
| NPS (non-government) | EPF | PPF | Senior Citizens' Savings Scheme | |
|---|---|---|---|---|
| Return | Market-linked | Rate declared yearly | 7.1% (Oct–Dec 2026) | 8.2% (Oct–Dec 2026) |
| At exit | Up to 80% lump sum; 60% of corpus tax-free; at least 20% annuity | Full withdrawal | Full withdrawal, tax-free | For retirees; interest taxable |
| Deduction in new regime | Employer contribution only | No | No | No |
For a deeper side-by-side, see NPS vs EPF for retirement and our comparison of retirement mutual funds, NPS and PPF. If you want NPS-style flexibility without any lock-in, NPS Tier 2 is an option, though without the tax benefits.
So, Is NPS Still Unpopular for Good Reason?
Less than before. The 2025 changes removed the biggest objection for non-government subscribers: you now need to annuitise only 20%, you can exit after 15 years, and small balances can be taken out in full. What remains is a tax mismatch (60% tax-free against an 80% lump-sum limit), taxable annuity income, and the fact that the deduction now helps mainly old-regime taxpayers. Whether NPS fits depends on your tax regime, whether your employer contributes, and how much of your retirement you want guaranteed as a pension.
This article explains NPS rules and their trade-offs. It is not investment or tax advice. Annuity rates in the example are illustrative.