NPS: Latest PFRDA Amendments & Tax Benefit

NPS 2025-26: Save Up to ₹2 Lakh in Tax, Build a Secure Retirement – Complete Guide with Latest PFRDA Amendments

1. Introduction

The National Pension Scheme (NPS) is a government-sponsored, long-term voluntary retirement savings scheme designed to help Indian citizens build a retirement corpus systematically. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and backed by the Central Government, NPS offers market-linked returns, significant tax advantages, and portability across employers and geographies.

Open to employees in the public, private, and unorganised sectors (excluding armed forces personnel), NPS allows subscribers to invest at regular intervals during their working years and draw a pension post-retirement. In recent years, the Government has also introduced NPS Vatsalya – an extension that lets parents open NPS accounts for minor children – and the Unified Pension Scheme (UPS) for central government employees.

This article presents a holistic overview of NPS – covering its structure, eligibility, withdrawal rules (including recent PFRDA amendments), tax benefits under both the Old and New Tax Regimes, and a comparison with the newly launched UPS. All provisions are based on the Income Tax Act, 1961, as applicable for FY 2025-26 (AY 2026-27).

2. Key Highlights & Recent Amendments

The PFRDA has recently amended NPS withdrawal rules through an official notification. The major changes are:

• NPS accounts can now be maintained by individuals up to 85 years of age (previously 70 years for account opening).
• A subscriber can make 100% lump-sum withdrawal on retirement if the total corpus is up to Rs. 8 lakh – annuity purchase is not mandatory in such cases.
• Non-government employees can withdraw up to 80% of the corpus as a lump sum at superannuation (government employees up to 60%).
• Budget 2025 extended all NPS tax benefits to NPS Vatsalya accounts as well.

3. NPS at a Glance

4. Eligibility Criteria

Any individual satisfying the following conditions is eligible to subscribe to NPS:

• Must be an Indian citizen – resident, non-resident (NRI), or Overseas Indian – aged between 18 and 85 years.
• Must comply with Know Your Customer (KYC) norms as specified in the application form.
• Must be legally competent to enter into a contract under the Indian Contract Act, 1872.
• Overseas Citizens of India (OCIs), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
• NPS is an individual pension account and cannot be opened on behalf of a third party.

5. Types of NPS Accounts – Tier-I & Tier-II

NPS offers two types of accounts: Tier-I and Tier-II. A subscriber must open a Tier-I account before being allowed to open a Tier-II account.

6. Key Features of NPS

6.1 Market-Linked Returns

Unlike fixed-return instruments such as PPF or NSC, NPS returns are linked to the performance of the underlying assets. Historically, NPS has delivered annualised returns in the range of 11% to 20%, making it one of the better-performing long-term retirement instruments. The actual return depends on the asset allocation chosen, the fund manager selected, and the duration of investment.

6.2 Investment Choices

Subscribers can choose from two modes of investment:

• Active Choice: The subscriber personally decides the allocation across asset classes – equity (E), corporate bonds (C), government securities (G), and alternative investment funds (A). Equity exposure is capped at 75% (50% for government employees and senior citizens).
• Auto Choice (Lifecycle Fund): The asset allocation is automatically determined based on the subscriber’s age. As the subscriber grows older, the equity component is progressively reduced in favour of stable debt instruments.

6.3 Flexibility & Portability

• Contributions can be made at any frequency during the financial year.
• Subscribers can change their fund manager if they are dissatisfied with performance.
• The account is portable across jobs and cities – no fresh registration is required when switching employers.
• Online account management is available through the NSDL Protean and KFintech portals.

6.4 Low Fund Management Charges

NPS is recognised for its very low fund management charge (FMC), which is among the lowest in the Indian financial product landscape. This allows a greater portion of contributions to remain invested and compound over time.

7. NPS Vatsalya

NPS Vatsalya is a dedicated variant of NPS that allows parents or guardians to open an NPS account for their minor children and make regular contributions. Once the child turns 18, the NPS Vatsalya account can be seamlessly converted into a standard NPS account. Following Budget 2025, all tax benefits applicable to NPS – including deductions under Sections 80CCD(1) and 80CCD(1B) – have been extended to NPS Vatsalya accounts, making it an attractive long-term wealth-building tool for children.

8. Withdrawal Rules (Post PFRDA Amendment)

8.1 For Government Employees

8.2 For Non-Government Employees

8.3 Partial Withdrawal

Subscribers can partially withdraw up to 25% of their own contributions (self-contributions only, excluding employer contributions) after completing three years of NPS membership. Such withdrawals are permitted for specific purposes prescribed by PFRDA, including:

• Treatment of specified critical illnesses of self, spouse, or children.
• Education or marriage expenses of children.
• Purchase or construction of a residential house.
• Establishment of a new business or venture.
• Incapacitation or disability of the subscriber.

A maximum of three partial withdrawals are allowed throughout the subscription period.

8.4 Upon Death of Subscriber

In the unfortunate event of the subscriber’s death before reaching the age of superannuation, the entire accumulated pension corpus is paid out to the nominee or legal heir. The nominee or family members also have the option to purchase an annuity if they so choose.

9. Tax Benefits Under NPS – Old Regime vs New Regime

One of the most frequently asked questions about NPS is: which tax benefits apply under the Old Tax Regime and which under the New Tax Regime (Section 115BAC)? The table below provides a clear, at-a-glance answer, followed by detailed explanations.

Note: This article is based on the Income Tax Act, 1961, as applicable for FY 2025-26 (AY 2026-27). It covers provisions under both the old and new tax regimes within the existing Act. The proposed New Income Tax Bill 2025 (once enacted) may alter some provisions.

9.1 Deduction Under Section 80CCD(1) – Self-Contribution

• Salaried employees can claim a deduction of up to 10% of Basic Salary + Dearness Allowance (DA) under Section 80CCD(1), subject to an overall ceiling of Rs. 1.5 lakh under Section 80CCE.
• Self-employed individuals can claim a deduction of up to 20% of gross total income under the same provision, again subject to the Rs. 1.5 lakh ceiling.
• This deduction is NOT available if the subscriber opts for the new tax regime under Section 115BAC.

9.2 Additional Deduction Under Section 80CCD(1B)

Over and above the Rs. 1.5 lakh limit under Section 80CCE, an additional deduction of up to Rs. 50,000 is available under Section 80CCD(1B) for contributions made to NPS Tier-I account. This brings the total possible NPS-related self-contribution deduction (for salaried employees under the old regime) to Rs. 2 lakh per annum. This benefit is not available under the new tax regime.

9.3 Employer’s Contribution – Section 80CCD(2)

Employer contributions to NPS on behalf of an employee are separately deductible under Section 80CCD(2) and are NOT subject to the Rs. 1.5 lakh ceiling of Section 80CCE. This benefit is available under both regimes:

• Old Tax Regime: Up to 10% of salary (Basic + DA) for private sector employers; 14% for Central Government employers.
• New Tax Regime: Up to 14% of salary for ALL employers – both Central Government and private sector. This is a significant enhancement that makes NPS particularly attractive even for those opting for the new regime.
• This deduction is not available to self-employed individuals under Section 80CCD(2), as it is exclusively for employer contributions.

Practical Tip: Even if you opt for the new tax regime and forego most deductions, you can still benefit from NPS by requesting your employer to route a portion of your CTC through the employer’s NPS contribution. Up to 14% of Basic + DA contributed by the employer is fully deductible under the new regime.

9.4 Tax Treatment on Withdrawal

Partial Withdrawal: Partial withdrawals up to 25% of self-contributions are fully exempt from tax under Section 10(12B) of the Income Tax Act, subject to PFRDA-prescribed conditions. This exemption applies regardless of the tax regime chosen.

Lump-Sum Withdrawal at Maturity: 60% of the total NPS corpus withdrawn as a lump sum at the age of 60 or superannuation is exempt from income tax under Section 10(12A). This exemption is available under both regimes.

Annuity Purchase: The amount used to purchase an annuity at retirement is exempt from tax at the time of purchase under Section 80CCD(5). However, the annuity income received subsequently is taxable as per the applicable income tax slab rates under Section 80CCD(3), irrespective of regime.

9.5 NPS Tier-II Tax Benefits – Section 80C

Government employees who contribute to NPS Tier-II accounts with a minimum 3-year lock-in can claim a deduction under Section 80C up to Rs. 1.5 lakh. This benefit is not available to private sector employees or to anyone opting for the new tax regime.

10. NPS vs UPS – A Comparison

The Central Government launched the Unified Pension Scheme (UPS) as an option available under NPS, effective from April 1, 2025. Unlike NPS where pension is market-linked, UPS guarantees a defined monthly pension upon completion of a minimum service period. Below is a comparison of the two schemes:

Government employees already covered under NPS can opt for UPS. Even those who have already retired under NPS can choose to migrate to UPS. It is important to note that UPS is exclusively available to Central Government employees, while NPS remains open to all Indian citizens.

11. How to Open an NPS Account

Opening an NPS account online takes approximately 30 minutes through the eNPS portal ( http://enps.nsdl.com). The following is a summary of the process:

• Visit the eNPS portal and select ‘New Registration’.
• Enter your PAN, Aadhaar, and registered mobile number for KYC verification.
• Authenticate using the OTP sent to your mobile number.
• Choose your Pension Fund Manager, investment option (Active or Auto), and provide your nominee details.
• Make the minimum initial contribution and submit the application.
• A Permanent Retirement Account Number (PRAN) is generated upon successful registration, which serves as your login ID for future transactions.

Alternatively, subscribers can open an NPS account offline through any Point of Presence (PoP) – typically banks and post offices empanelled by PFRDA.

12. NPS Login & Customer Care

Existing subscribers can log in to manage their NPS account through two authorised CRA (Central Recordkeeping Agency) portals:

• NSDL Protean portal: https://cra-nsdl.com/CRA/
• KFintech portal: https://nps.kfintech.com

In both cases, the PRAN serves as the User ID. Subscribers can view statements, change fund managers, update nominees, and initiate withdrawal requests online.

NPS Call Centre: 1800 110 708 (Toll-Free) | For registered subscribers: 1800 222 080

NPS SMS Service: SMS ‘NPS’ to 56677

13. Other Advantages of NPS

• Investment Flexibility: Subscribers can choose from multiple asset classes (equity, corporate bonds, government securities) and switch fund managers based on performance.
• Transferability: The PRAN remains constant across job changes, requiring minimal paperwork.
• Transparency: PFRDA enforces transparent investment norms with regular fund performance reviews published by the NPS Trust.
• Retirement Discipline: The mandatory annuity component ensures a regular income stream post-retirement, preventing premature depletion of the corpus.
• Wealth Accumulation: With compounding over 20–35 years, even modest monthly contributions can build a substantial retirement corpus.

14. Conclusion

The National Pension Scheme is one of the most tax-efficient and cost-effective retirement planning instruments available to Indian citizens today. With a potential tax deduction of up to Rs. 2 lakh per year for salaried employees (and up to 14% of salary from employer contributions under the new regime), market-linked returns historically in the double digits, and recently enhanced withdrawal flexibility, NPS deserves serious consideration in any individual’s long-term financial plan.

However, investors with a higher equity appetite might also explore Equity Linked Savings Schemes (ELSS) or direct equity mutual funds for a portion of their retirement corpus. The ideal approach is to use NPS as the core retirement vehicle – leveraging its tax benefits and disciplined structure – while complementing it with other instruments based on individual risk tolerance.

For government employees, the newly introduced UPS provides an attractive defined-benefit alternative within the NPS framework, offering predictability and income security in retirement.

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Disclaimer

This article is prepared for general informational purposes only and does not constitute professional legal, tax, or financial advice. The information is based on provisions in force as of April 2026. Readers are advised to consult a qualified Chartered Accountant or tax advisor before making any investment or tax-planning decisions. The author and publisher shall not be liable for any loss arising from reliance on this art