When you reach retirement age (typically 60 for the standard NPS exit, though early exit rules exist), your accumulated NPS corpus doesn't simply become a lump sum you can withdraw entirely — a portion is mandatorily used to purchase an annuity.
Under current rules, at least 40% of your corpus must go toward buying an annuity from an insurance provider, which then pays you a regular pension for life. The remaining portion — up to 60% — can be withdrawn as a lump sum, and this lump sum portion is tax-free.
The annuity portion, once purchased, provides you a monthly pension, but the pension amount itself is taxable as regular income in the years you receive it — it's the lump sum withdrawal that's tax-free, not the ongoing annuity payments. You also get to choose from different annuity plan types (life annuity, annuity with return of purchase price to nominee, and others), each with different monthly payout amounts and different treatment of the principal after your lifetime.
Because the annuity purchase is largely locked in at retirement and determines your pension for the rest of your life, it's worth comparing annuity providers and plan types carefully as retirement approaches, rather than defaulting to whichever option is presented first.
Frequently asked questions
What is the National Pension System (NPS)?
NPS is a government-regulated, market-linked retirement savings scheme open to Indian citizens aged 18 to 70, where regular contributions are invested in a mix of equity, corporate bonds, and government securities, building a corpus for retirement that is partly withdrawn as a lumpsum and partly used to buy an annuity.
How does the NPS calculator estimate my retirement corpus?
It projects your regular monthly contributions growing at an assumed annual rate of return until your chosen retirement age, using compound growth on a monthly SIP-style basis, and then splits the resulting corpus between a lumpsum withdrawal and an annuity purchase based on your inputs.
What is the minimum and maximum age to open an NPS account?
Indian citizens can open an NPS account between the ages of 18 and 70, and can continue contributing until age 75 under certain conditions, though the earlier you start, the more time your contributions have to compound.