The National Pension System
A pension account with two tiers, an unbundled structure where no single entity controls the system, and one rule that decides everything — at least 40% of the corpus must buy an annuity.
Chapter 3 · Beginner
The vehicle built specifically for retirement in India, and the one whose rules most people discover late.
Who can join
PFRDA's eligibility, read 4 October 2026:
- Any Indian citizen, resident or non-resident, and Overseas Citizens of India
- Aged between 18 and 70
- KYC compliant
Hindu Undivided Families and Persons of Indian Origin are not eligible. And a point worth noting: "NPS is an Individual Pension Account and cannot be opened on behalf of a third person." One account per person — you cannot hold multiple NPS accounts, though you can hold NPS alongside any other pension scheme.
Two tiers, and only one is a pension
The distinction that causes the most confusion.
| Tier I | Tier II | |
|---|---|---|
| What it is | Individual Pension Account | Optional account, needs an active Tier I |
| Withdrawals | As per rules and regulations only | Unrestricted |
| Minimum contribution | ₹500 | ₹1,000 to open |
| Minimum per year | ₹1,000 | ₹250 |
| Tax benefits | Available | None on contribution or gains |
PFRDA is explicit: "Tier-II is not a Pension Account." It is an optional investment account with no withdrawal restrictions and no tax benefits, available only to someone who already has an active Tier I.
So Tier I is the retirement vehicle. Tier II is an investment account that happens to live in the same place, and it should be judged against ordinary mutual funds on cost and flexibility rather than treated as part of the pension.
The unbundled structure
Worth understanding, because it is a genuine design feature rather than administrative detail.
PFRDA describes NPS as having "a unique unbundled architecture wherein each intermediary is assigned a specialized activity by the Regulator" — the point of presence, the pension fund, the central recordkeeping agency, the trustee bank, the annuity service provider, retirement advisors, the custodian and the NPS Trust.
And the reason:
This unique structure safeguards subscribers' interest as the role of a particular intermediary is limited to the functions assigned to it and no single intermediary/entity has complete control over NPS as a System.
That is chapter 1 of the Mutual funds subject's separation of roles, applied again: the entity managing the money is not the entity holding the records is not the entity paying the pension.
Getting money out before 60
Deliberately hard, which is the point of a pension account.
Partial withdrawal. After three years, up to 25% of your own contributions — not the whole corpus, and not the employer's share. Permitted a maximum of three times across your entire tenure, and only for specified reasons: children's higher education or marriage, purchasing or constructing a house, treatment of specified illnesses, disability of more than 75%, skill development, or establishing your own venture.
Premature exit. After five years, you may take a maximum of 20% as a lump sum, and a minimum of 80% must buy an annuity. If the corpus is below ₹2.5 lakh, the whole amount is paid as a lump sum.
Read that second one carefully. Leaving early does not release your money — it releases a fifth of it and converts the rest into a pension you did not plan to start.
Exit at 60
The rule that shapes every decision about the NPS:
subscriber can withdraw maximum 60% of the corpus as lumpsum and minimum 40% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension
At most 60% as cash. At least 40% must buy an annuity. If the corpus is below ₹5 lakh, the entire amount is paid as a lump sum.
You are not free to take the whole corpus and invest it yourself. Chapter 4 is what that 40% actually buys, because it is the least understood product in Indian retirement.
The flexibility that does exist
More than most people realise.
You can continue in NPS to 75, exiting any time after 60. At 75 the account must be closed.
On exiting you may defer the lump sum to 75, or take it in instalments; and you may defer the annuity purchase to 75.
That deferral matters more than it sounds, and chapter 7 explains why: it gives you some control over when you convert to an annuity, which is a decision whose timing affects the income for the rest of your life.
On death, the nominee or legal heir can withdraw the entire accumulated corpus, and may purchase an annuity if they wish.
What the NPS does not promise
PFRDA states it directly, and it is the sentence to remember:
Under NPS, there is no implicit or explicit assurance of benefit and the investments are subject to market conditions.
It is not a guaranteed pension. The amount depends on contributions, on returns, and on the annuity rate available when you buy — three variables, none fixed in advance.
The point
NPS Tier I is a pension account with tax benefits and restricted withdrawals; Tier II is an unrestricted investment account with none and is not a pension account. Partial withdrawal is capped at 25% of your own contributions, three times, for specified reasons. At normal exit at least 40% must buy an annuity and at most 60% comes as cash — and nothing about the outcome is assured.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Work out what 40% of your projected retirement corpus would be, and what annual income an annuity on that amount might produce. That is the part of your corpus whose use is decided for you.
The 40% is a minimum, not a maximum, and it applies to the NPS corpus rather than to everything you own. Chapter 4 is what an annuity actually buys.