NPS explained: tiers, returns, tax benefits and withdrawal rules 2026

NPS is the National Pension System. You contribute while you work. The money is invested in pension funds you choose. It is not a small-savings account with a rate the Finance Ministry prints every quarter. The return is whatever those funds earn.

At exit, part of the Tier I corpus can be taken in cash and part buys an annuity, which is a pension from an insurer. The cash is tax-free only up to 60% of the corpus. The pension is taxed when it is paid. That pattern is EET, not the tax-free maturity of PPF.

The NPS calculator projects one corpus from a monthly contribution and a return you type. It is a non-government exit at 60. A government subscriber’s annuity share is different and is not calculated here.

Tier I and Tier II

Tier I is the pension account. It opens by default. Withdrawals are the exit rules and the partial-withdrawal rules below. This is the account the tax sections attach to.

Tier II is optional. You can open it only when Tier I is already active. PFRDA describes it as an investment account. A normal Tier II balance can be withdrawn at any time. It is not eligible for the tax benefits on this page. It closes when you exit NPS, and the balance is paid out to the bank account you gave.

There is a separate Tier II tax-saver account, notified for central government employees. That one has a lock-in under its own scheme, and the contribution can sit in the section 123 basket (this was section 80C). A normal Tier II account is not that scheme. Do not claim a deduction on a Tier II balance just because the words “NPS” are on the statement.

NRIs and OCIs with a Tier I account are not permitted to activate Tier II. You can choose different pension funds for the two tiers. The calculator on this site follows Tier I contributions only.

Returns are not notified

PPF has a rate for the quarter. NPS does not. You pick a pension fund and an asset mix: equity, corporate debt, government securities, and in some choices an alternative fund. Active choice and auto choice change how much can sit in equity as you age. The calculator does not apply those caps. It compounds one yearly rate you type.

Each contribution goes in at the start of the month, then earns one month of growth. The monthly rate is the yearly return divided by 12. A step-up raises only your own amount on each anniversary. An employer amount stays flat. Missed months are not modelled.

10% is the box the calculator opens with. 6% is the annuity rate it opens with. Neither is an insurer’s quote. The pension you are actually offered depends on your age and the annuity option. Change both numbers before you treat the result as a plan.

Tax on the way in

From 1 April 2026 the Income-tax Act, 2025 uses new section numbers. A return for FY 2025-26 still uses 80CCD. The rules below are for FY 2026-27.

Your own contribution, inside the ₹1,50,000 cap, is Section 123 read with Schedule XV, paragraph 1(y). That was Section 80CCD(1). For an employee the Act limits this piece to 10% of salary. For anyone else it is 20% of gross total income. Either way it shares the section 123 basket with PPF, EPF, ELSS and life insurance. It is not a second ₹1,50,000.

A further ₹50,000 is Section 124(3). That was Section 80CCD(1B). It sits outside the ₹1,50,000 cap. You cannot claim the same rupee under both.

The employer’s contribution is Section 124(1) and Section 124(2). That was Section 80CCD(2). It is 14% of salary for the Central or a State Government. It is 10% for any other employer, or 14% when you are taxed under Section 202. This employer piece is outside the ₹1,50,000 cap.

Section 202 (this was Section 115BAC) keeps the employer deduction. It drops Section 123 and Section 124(3). In the new regime your own NPS does not reduce tax. Your employer’s NPS still can, within the percentage. The old versus new regime guide is the wider choice. The section-number guide is the crosswalk if a form still says 80CCD.

The calculator does not turn these caps into a tax saving. It does not ask for your salary. A ₹5,000 contribution is ₹60,000 a year, which is inside ₹50,000 plus the section 123 room, but the 10% of salary test still needs your salary. Check that before you assume the whole contribution is deductible.

A worked corpus, and what is tax-free

₹5,000 a month from age 30, at 10% a year, with no step-up and no employer contribution. You contribute for 30 years. You put in ₹18,00,000. The corpus is ₹1,13,96,627. The growth in this picture is ₹95,96,627.

The calculator’s default annuity share is 40%. That buys an annuity of ₹45,58,651. The lump sum is ₹68,37,976. All of that lump sum is inside the 60% cap, so the taxable lump sum on this split is ₹0. At an annuity rate of 6%, the pension estimate is ₹22,793 a month. That is the purchase price times the rate, divided by 12. An insurer may quote something else.

If you take the smallest annuity the rules allow on this corpus, 20%, the lump sum rises to ₹91,17,302. Only ₹68,37,976 of it is tax-free. ₹22,79,326 is taxable. The annuity falls to ₹22,79,325, and the pension estimate falls to ₹11,397 a month. A larger cash share is allowed. It is not free of tax past 60%.

Section 124(9) does not treat the annuity purchase itself as money received that year. Section 124(6) taxes the lump sum that is not exempt, and it taxes the pension when you receive it. The calculator does not guess a future slab for that pension.

Repeat it on the NPS calculator. If 10% feels high, type a lower rate and read the corpus again. The tax-free percentage does not change with the rate. The rupees do.

What you can take at 60

For a non-government subscriber, a normal exit at 60, or after 15 years of joining, needs at least 20% of the corpus in an annuity. Up to 80% can be a lump sum.

If the corpus does not exceed ₹8,00,000, the whole amount can be taken in cash. If it is above ₹8,00,000 and up to ₹12,00,000, you may instead take up to ₹6,00,000 in cash and use the rest for a systematic unit redemption of at least six years. The worked example above is past both bands, so those easier exits do not apply to it. The calculator does not build the six-year redemption.

You can stay in until 85. This page stops at 60.

A premature exit is a different rule. At least 80% must buy an annuity, unless the corpus is ₹5,00,000 or less, in which case the whole amount can be taken in cash. The calculator does not run that path. Do not use the age-60 picture for a resignation at 45.

A government subscriber’s exit uses its own annuity share. Do not copy the 20% line onto a government account without reading that rule.

Partial withdrawal while you are still in

Tier I is not locked against every emergency. After 3 years from the date you joined, a partial withdrawal is allowed. It is capped at 25% of your own contributions. Returns are not part of that percentage. The employer’s contributions are not part of it either.

Before 60 you can do this at most 4 times, with at least 4 years between two withdrawals. After 60, if you are still in, you can withdraw until 85, with at least 3 years between withdrawals.

The purposes are set in the exit regulations. They include higher education of children, a child’s marriage, a one-time purchase or construction of a house in your name or with your spouse (not if you already own a house other than ancestral property), treatment of specified illness, disability, and settlement of a loan taken from a regulated lender against the NPS account. A partial withdrawal is not a general ATM.

The corpus in the calculator assumes you never took one. A withdrawal lowers the amount that later compounds. If you expect to use it for a house, do not also count the full ₹1,13,96,627 as untouched.

Tier II, the ordinary one, does not need this list. You can withdraw it when you want. It also does not get the Tier I deductions. Mixing the two statements is the usual mistake.

Figures were checked on 28 October 2026 against the PFRDA exit regulations as amended to 20 July 2026, the All Citizen withdrawal FAQ, PFRDA’s Tier I and Tier II description, and the Income-tax Act, 2025 sections the calculator already cites. The 10% and 6% figures are not part of that check. They are inputs. The limits on the annuity, the lump sum and the tax-free share are the rules.