Ask a salaried person why they invest in NPS and the answer is usually “for the tax deduction.” Fair enough. But most people cannot say how much they can actually claim, when they are allowed to touch the money, whether they can borrow against it, or what their family would receive if something happened to them. Those are the questions that decide whether NPS belongs in your plan.

Here is the current position on all of it, in plain English, with a calculator so you can see what your own numbers look like.

What NPS actually is

The National Pension System is a retirement account regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is not a bank deposit and it is not insurance. Money you put in buys units in funds holding equity, corporate bonds and government securities. You choose how much goes where — or you let it shift automatically towards safer assets as you get older.

There are two accounts. Tier I is the retirement account: locked, tax-favoured, and the one this note is about. Tier II is an open-access account you can withdraw from at any time — no lock-in, and for ordinary subscribers no tax benefit.

The deduction that matters: 14% from your employer

Under section 80CCD(2), the contribution your employer makes to your NPS account is deductible up to 14% of your Basic + DA. This applies to government and private employers alike, and it is available on the new tax regime.

That makes it, for most salaried people on the new regime, the single largest deduction still within reach. What it is worth:

Tax saved is computed at the 30% slab plus 4% cess on the full 14%. Your employer has to actually offer an NPS contribution and structure it into your CTC — you cannot claim 80CCD(2) on money the employer never paid. If it is not in your salary structure, ask for it.

Three ways people lose this deduction

1. Fourteen per cent of what. Not of CTC, and not of gross salary. The law defines salary here as basic pay plus dearness allowance where the terms of employment provide for it, and excludes every other allowance and perquisite. HRA, special allowance, bonus and reimbursements are all outside it.

2. Do not round up. The cap is exactly 14%. Returns get rejected because a contribution was rounded to a neat figure that landed a rupee or two above the ceiling. The validation is arithmetic, not sympathetic. Work out the limit, then stay under it.

3. Match it to Form 16. What you claim must agree with the employer contribution reported in your Form 16 and Form 12BA. A mismatch between your return and your employer’s filing is exactly the kind of thing that gets flagged.

There is also a ceiling most people never hear about. Employer contributions to NPS, recognised provident fund and an approved superannuation fund are tax-free together only up to ₹7.5 lakh a year. Anything above that is taxed as a perquisite in your hands, along with the investment returns earned on the excess.

See what it actually builds

Tax relief is why people start. The corpus is why it matters. Put your own numbers in — the totals update as you type.

What does NPS actually return?

Ten-year annualised figures, as on 24 July 2026. NPS scheme returns are published by the NPS Trust; the fund categories are shown for scale.

Scheme E ranges cover the pension fund managers with a ten-year record. Fund-category figures are regular-plan averages; direct plans run roughly half a percentage point higher. Costs shown are all-in: NPS is lowest through the e-NPS route, higher through a distributor.

Read honestly, that says three things. NPS equity has roughly matched the index and beaten the large-cap category, but a good flexi-cap fund has done better. The NPS debt schemes are doing what debt does — so a blended NPS allocation lands around 10–11%, below pure equity. And NPS charges a fraction of what a regular mutual fund charges, which over thirty years is worth more than it looks: a gap of about 0.85 percentage points a year compounds to roughly a quarter more money at the end.

One caveat we are not going to bury. Over the last twelve months NPS equity is down, in line with the market. Every figure above is a long-horizon average, not a forecast, and not a promise.

The part that actually decides it: you invest before tax

Comparing headline returns misses the real difference. Money your employer routes into NPS is deductible; money you take as salary and then invest has already been taxed.

Take ₹10,000 a month of CTC, for someone in the 30% slab:

• Routed into NPS by the employer → ₹10,000 is invested.
• Taken as salary, then invested → ₹6,880 is invested, after 31.2% tax.

That is 45% more money working from day one, before a single rupee of return. Run both for thirty years at the same rate and the deduction alone is worth about ₹87 lakh. This, not the fund performance, is why the employer route is worth asking for.

Where NPS costs you

Three things sit on the other side of the ledger, and they are the reason NPS is a complement to your investments rather than a replacement for them.

• Liquidity. A mutual fund can be sold on a Tuesday. NPS is locked to 60, with partial withdrawals capped at 25% of your own contributions.
• The exit tax trap. You may now take up to 80% as cash — but the tax exemption is still capped at 60% of the corpus. Take the full 80% and that extra slice is taxed at your slab rate. On a ₹2.7 crore corpus that is roughly ₹17 lakh of tax that most people do not see coming.
• The annuity. At least 20% has to buy a pension, annuity rates are modest, and the pension is taxable at slab for the rest of your life.

For contrast, equity mutual fund gains are taxed at 12.5% above the ₹1.25 lakh annual exemption, and you decide when to realise them.

When can you take the money out?

NPS is deliberately illiquid, and it is worth knowing the rules before you commit rather than after.

For an All Citizen subscriber, normal exit arrives at 15 years of subscription or age 60, whichever is earlier. You can also keep contributing and stay invested until age 85, and there is no minimum lock-in before you are allowed to take a premature exit — though leaving early costs you flexibility, since 80% of the corpus then has to buy an annuity unless it is ₹5 lakh or less.

What if you need money before then?

You can take a partial withdrawal without closing the account:

• You must have been in the scheme at least three years.
• Up to 25% of your own contributions — not the employer’s share, and not the investment growth.
• Four times before age 60, with a four-year gap between withdrawals. After 60 there is no cap on frequency, but a three-year gap applies.
• The money is tax-free in your hands.

Permitted reasons include medical treatment or hospitalisation of you, your spouse, children or parents — and this now applies broadly, without having to match a list of specified critical illnesses. Higher education and marriage of children qualify. Buying or building a house qualifies once, and only if you do not already own one.

Can you take a loan against NPS?

Straight answer: no — not the way you can with EPF or PPF. There is no facility to borrow from your own NPS balance and repay it with interest.

There is one nuance. A subscriber may seek financial assistance from a regulated financial institution, and that lender may mark a lien or charge on the NPS account, capped at 25% of the subscriber’s own contributions. So NPS can sit behind a loan as security. PFRDA has said this will operate under guidelines it will issue, and until banks build products around it, treat this as a door that has been opened rather than one you can walk through today.

The planning point stands: NPS is not your emergency fund. Keep liquidity elsewhere.

The pension itself — and when it ends

Whatever is not taken as cash must buy an annuity from an insurer empanelled with PFRDA. You choose the insurer and the variant at the time of exit. The variant decides what happens when you die, and it is the most under-discussed decision in the whole scheme.

A family income variant is also offered, continuing the pension to spouse, then mother, then father, before returning the purchase price. Pension received is taxable as your income in the year you receive it.

If you die before retirement

For a private-sector or All Citizen subscriber, your nominee or legal heir receives 100% of the accumulated corpus as a lump sum, and it is not treated as their income. Nobody is compelled to buy an annuity — it is offered as an option.

Government sector works differently. Where the corpus exceeds ₹12 lakh, at least 80% must buy the default annuity — a joint-life annuity covering the spouse with return of purchase price, which then passes to the subscriber’s mother and father before the capital returns to the heirs. Below ₹8 lakh the nominee can take the whole amount.

One thing worth checking tonight: is a nominee registered on your NPS account? Without one, your family needs a succession certificate to claim what is already theirs.

Two things to weigh before you decide

Whether NPS belongs in your plan depends on your income, your other savings and how much liquidity you need — but two points decide it for most salaried people.

• Use the employer route. At 14% of Basic + DA, 80CCD(2) is the largest single deduction most salaried people can still access, and it costs you nothing but a conversation with your employer about how your CTC is structured.
• Do not treat it as savings. It is deliberately illiquid, it is not a loan source, and the part that becomes a pension is taxed when it reaches you. It is a retirement instrument that happens to be tax-efficient — not a tax instrument that happens to fund retirement.

Where to read the rules yourself

• Section 80CCD of the Income-tax Act — the deduction and the 14% limit.
• Section 17(2) — the ₹7.5 lakh perquisite ceiling on employer contributions.
• PFRDA press release on the exit and withdrawal rules — the current exit position, rule by rule.
• PFRDA list of annuity service providers — the empanelled insurers and every annuity variant.
• NPS Trust — scheme returns, forms and subscriber information.

Working out whether the employer route is worth restructuring your CTC for, or which annuity variant fits your family — that is the kind of thing we do every week. Talk to Chartford and we will run your actual numbers.

Educational information on tax and pension rules — not investment advice, and not a recommendation to buy or sell any product. Scheme and fund returns shown are past figures from the sources cited, dated 24 July 2026; past performance does not indicate future returns. Chartford Consultancy is a chartered accountancy firm and is not registered with SEBI as an investment adviser.

AI-assisted note, reviewed by Chartford Consultancy. Rules and figures can change with government notifications — talk to us to confirm exactly what applies to your business.