NPS, A Complete Guide to Investment Options, Tax Benefits, Withdrawals and the New Retirement Income Scheme

Retirement planning is no longer just about saving money. The bigger challenge is ensuring that your savings can support you for decades after your regular income stops. Rising life expectancy, increasing healthcare costs, and inflation have made retirement planning one of the most important financial decisions investors faces today.

The National Pension System (NPS) was created to address this challenge. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS combines long-term investing, tax benefits, market-linked returns, and retirement income planning within a single framework.

Over the last few years, NPS has undergone several important changes. Investors now have more flexibility in choosing asset allocation, lifecycle funds have evolved, withdrawal rules have been revised, and a new Retirement Income Scheme (RIS) has been introduced to create a more structured retirement income solution.

This guide covers everything investors need to know about NPS, including account types, tax benefits, investment choices, withdrawal rules, and the latest retirement income options.

What is the National Pension System (NPS)?

The National Pension System (NPS) is a government-backed retirement savings scheme designed to help individuals build a retirement corpus through disciplined long-term investing.

The scheme is open to employees of the public sector, private sector, and even self-employed individuals. Contributions made during the working years are invested in market-linked assets such as equities, government securities, and corporate bonds. At retirement, investors can withdraw part of the accumulated corpus and use the remaining amount to generate retirement income.

Unlike traditional pension products that offer predetermined returns, NPS returns depend on market performance.

Tier I and Tier II Accounts

NPS offers two account structures.

1. Tier I Account

Tier I is the primary retirement account and forms the foundation of NPS. It comes with tax benefits but also carries withdrawal restrictions.

it is Eligible for tax deductions, Minimum contribution of ₹1,000 annually, designed for retirement accumulation, Restricted withdrawals

Tier II Account

Tier II functions more like a voluntary investment account. It has No lock-in period, no annual contribution requirement, withdraw anytime, Available only after opening Tier I, Limited tax benefits

Tax Benefits Under NPS

One of the biggest advantages of NPS is its tax efficiency.

Under the Old Tax Regime

An investor can claim deductions of up to ₹2 lakh through personal contributions, Employer contributions remain eligible for additional tax benefits.

Under the New Tax Regime

Although most deductions are unavailable under the new tax regime, employer contributions to NPS remain eligible for deduction under Section 80CCD(2).

Employer contributions can be claimed up to 14% of salary for government employees and up to 10% for other employees, subject to applicable provisions.

How NPS Investments Work

Many investors think NPS is a single investment product. In reality, it operates as a retirement investment platform.

Every investor must make two important decisions:

• • Asset Allocation
• • Investment Option Selection

The first decision determines where money is invested. The second determines who controls the allocation process.

NPS Asset Classes

NPS investments are spread across different asset classes.

• 1.Class E: Equity = This is the growth engine of the portfolio.

Scheme E invests in listed equities and equity-related instruments. Although it carries higher volatility, it also has the greatest potential to generate inflation-beating returns over long periods.

• 2.Asset Class C: Corporate Bonds

Scheme C invests in debt securities issued by corporations and infrastructure-related entities. Risk is generally lower than equities but higher than government securities.

• 3.Asset Class G: Government Securities

Scheme G invests in government bonds and state development loans. Default risk is minimal, though returns can fluctuate due to interest-rate movements.

• 4.Asset Class A: Alternative Investments

Scheme A was introduced to provide exposure to alternative assets such as:

REITs, InvITs, Alternative Investment Funds (AIF Category I and II), Basel III Tier-1 Bonds, Securitized Papers

These investments generally carry higher risk and are meant to provide diversification benefits.

Important Regulatory Update by PFRDA's December 2025 circular introduced major changes:

• Scheme A is being phased out. Existing investment avenues are being integrated into other schemes. Gold ETFs and Silver ETFs have now been permitted under revised investment structures.

Active Choice vs Auto Choice

NPS offers two approaches for managing investments.

• • Active Choice = Under Active Choice, investors decide how their money is allocated across asset classes

• • Auto Choice

Many investors are not comfortable making allocation decisions. Auto Choice solves this problem by automatically adjusting asset allocation according to age.

As investors grow older, equity exposure gradually declines while allocations to debt and government securities increase. This creates a natural transition from growth-oriented investing during early career stages to capital preservation closer to retirement.

Lifecycle Funds Under Auto Choice

NPS currently offers three lifecycle funds.

1. LC75 Aggressive Suitable for younger investors with a high-risk appetite. Equity exposure begins at 75% and gradually declines with age.

2. LC50 Moderate Suitable for investors seeking a balance between growth and stability. Equity allocation begins at 50%. This remains the default option under NPS.

3. LC25 Conservative Designed for risk-averse investors. Equity exposure begins at only 25%, with the majority invested in debt-oriented assets.

• New Balanced Lifecycle Fund (2024)

In October 2024, PFRDA introduced the Balanced Lifecycle Fund. Traditional lifecycle funds begin reducing equity allocation after age 35.

The Balanced Lifecycle Fund allows investors to maintain higher equity exposure until age 45 before gradually reducing risk. This recognizes the reality that modern investors often work longer and remain invested for longer periods.

For investors seeking a middle ground between aggressive growth and excessive conservatism, the Balanced Lifecycle Fund may emerge as one of the most relevant retirement allocation options.

New Market Linked Separate Fund (MSF)

Another major development came through the new Market Linked Separate Fund (MSF) framework introduced in September 2025. The MSF framework allows investors to access pure equity-oriented investment options within NPS.

This marks a significant shift from the traditional allocation structure and provides investors with greater flexibility in designing long-term retirement portfolios. To read in detail on MSF Click here

Updated NPS Withdrawal Rules

The withdrawal framework has undergone significant changes. Subscribers can now maintain their NPS account until the age of 85 years.

The revised framework introduces different withdrawal thresholds depending on corpus size and category of subscriber.

Withdrawal Rules for Government Employees

Withdrawal Rules for Non-Government Employees

Systematic Withdrawal Facility

Retirement does not necessarily require a one-time withdrawal. Subscribers can choose systematic withdrawals at: Monthly intervals, Quarterly intervals, Half-yearly intervals, Yearly intervals

This provides greater flexibility in retirement income planning.

Premature Exit Rules If a subscriber exits NPS before reaching retirement age: At least 80% of the corpus must be used to purchase an annuity. Up to 20% can be withdrawn as a lump sum.

However, if the corpus is ₹5 lakh or lower, complete withdrawal is permitted.

Death Benefit Rules

Upon the death of the subscriber, the accumulated corpus is generally transferred to the nominee or legal heir according to the applicable withdrawal rules.

For many categories of subscribers, the nominee may receive the entire accumulated corpus.

The New Retirement Income Scheme (RIS)

One of the most important reforms in NPS is the introduction of the Retirement Income Scheme (RIS).

Historically, retirees faced two broad choices: Withdraw eligible lump sum amounts or Purchase annuities for retirement income.

The RIS framework introduces a third option.

Instead of immediately withdrawing retirement savings, retirees can now opt for structured withdrawals while allowing the remaining corpus to stay invested. The objective is to create a more sustainable retirement income stream while addressing longevity risk.

RIS Was Introduced because of the biggest retirement risk which is running out of money. A retiree who withdraws too much too early may exhaust the corpus prematurely. On the other hand, excessive conservatism can reduce quality of life during retirement.

RIS attempts to balance these competing objectives.

• It allows retirees to: Continue participating in market growth, generate regular income, Reduce the risk of exhausting retirement savings too early, Follow a structured withdrawal path.

RIS Asset Allocation Pathway

Under RIS, asset allocation automatically becomes more conservative with age. The gradual shift seeks to preserve capital while still maintaining limited growth potential.

SUR vs SPR, Understanding the Two Withdrawal Methods

RIS offers two withdrawal mechanisms.

• 1. SUR (Systematic Lump Sum Withdrawal)

Under SUR, a fixed number of units are redeemed at regular intervals. Because NAV changes over time, the actual payout amount varies.

This approach is more market-linked and suitable for investors who are comfortable with fluctuations in withdrawal amounts.

• 2. SPR (Systematic Periodic Withdrawal)

SPR is the default option under RIS. Instead of withdrawing a fixed number of units, retirees receive payouts based on age-linked percentages prescribed under the framework.

This creates a more structured withdrawal process. The annual payout amount is calculated using Withdrawal percentage applicable to age, Remaining corpus value, Current market value of investments

As a result, payout amounts may still vary, but the framework is designed to provide a more predictable withdrawal path than SUR.

Age-Wise SPR Payout Rates

RIS Advantages

The RIS framework offers several potential benefits:

• • Structured retirement income
• • Continued market participation
• • Better management of longevity risk
• • Reduced likelihood of premature corpus depletion
• • Greater flexibility than traditional annuities

RIS Risks and Limitations

Investors should also understand the trade-offs.

• • Returns are not guaranteed.
• • Income remains market linked.
• • Future payouts can fluctuate.
• • Poor market performance may affect sustainability.
• • The framework is more complex than a traditional annuity.

Risk-averse investors seeking guaranteed income may still prefer conventional annuity products.

What Matters Most for Investors

Many investors focus excessively on tax deductions when evaluating NPS.

The more important questions are:

• • How much equity exposure is appropriate?
• • Which lifecycle strategy aligns with retirement goals?
• • How should retirement withdrawals be structured?
• • How will inflation affect future purchasing power?

Tax benefits improve outcomes, but asset allocation and withdrawal strategy ultimately determine retirement success.

For younger investors, the most important decision may be maintaining adequate equity exposure. For retirees, the more important question may be whether a traditional annuity or the new RIS framework better aligns with income needs and risk tolerance.

Frequently Asked Questions (FAQs)

1. Is NPS suitable for young investors?

Yes. A longer investment horizon allows greater compounding and wealth creation.

2. Can self-employed individuals invest in NPS?

Yes. Any Indian citizen aged 18 to 85 can open an NPS account.

3. Active Choice or Auto Choice: Which is better?

Active Choice offers control, while Auto Choice automatically adjusts allocation with age.

4. Can I withdraw my entire NPS corpus at retirement?

Yes, if the corpus falls within specified thresholds. Larger corpus amounts may require annuity allocation.

5. What is the key benefit of the new RIS option?

It provides regular income while keeping the remaining corpus invested.

If you would like to evaluate whether NPS fits your retirement goals, tax situation, and broader investment strategy, consider booking a free consultation with Vinca Wealth.