NPS: Cheap, Tax-Efficient, and Only Partly Yours at 60
The accumulation phase is genuinely excellent. The exit rules are where the trade-offs live, and they are worth understanding before you commit.
What NPS does well
Fund management charges are among the lowest of any pooled retirement product anywhere, and the fee compounds in your favour over a thirty-year accumulation. You choose an allocation across equity (E), corporate debt (C) and government securities (G), with an auto-choice lifecycle option that de-risks as you age.
The tax treatment is the other draw. Beyond the Section 80C limit, Section 80CCD(1B) gives an additional deduction of up to ₹50,000 a year specifically for NPS — which, in the highest slab, is a meaningful annual saving compounded over a career.
Accumulation (annuity due)
FV = P × [((1 + r/12)^(12N) − 1) ÷ (r/12)] × (1 + r/12)
- P = monthly contribution, N = years to 60
- Contributions assumed at the start of each month
The exit rule that surprises people
At 60 you cannot simply take the money. At least 40% must buy an annuity from an approved insurer. Up to 60% may be withdrawn as a tax-free lump sum.
That compulsory annuity is the central trade-off. It guarantees income for life, which is real longevity protection. But annuity rates are whatever insurers quote on the day you retire — you have no control over them and no way to hedge — and the income is taxable as ordinary income in the year received, unlike the lump sum.
Move the annuity rate slider and watch the pension figure. A single percentage point changes the monthly income substantially, and you will not know your rate until the day you exit.
What the pension figure does not include
The monthly pension shown applies your assumed rate to the annuity corpus. Three things it does not adjust for:
Tax. Annuity income is taxable. The figure above is gross.
Inflation. Most annuities in the Indian market are level, not index-linked. A pension fixed at 60 buys progressively less every year of a thirty-year retirement.
Annuity type. A joint-life annuity covering a spouse, or one returning the purchase price to heirs, pays a lower monthly amount than the simple life annuity implied by a single rate.
Tier 1 versus Tier 2
Tier 1 is the retirement account: locked to 60, tax deductions available, exit rules as above. Tier 2 is a voluntary savings account with no lock-in and no deduction for most subscribers — effectively a low-cost mutual fund wrapper. Only Tier 1 is modelled here.