NPS

What is it

NPS is a government-regulated retirement account where your contributions get invested in a mix of equity, corporate bonds, and government securities (you choose the mix), growing until you turn 60. At retirement, you can withdraw 60% as a tax-free lump sum, but the remaining 40% must buy an annuity — a monthly pension for life, which is itself taxable.

NPS was introduced in 2004 for government employees and opened to all citizens in 2009, as India moved away from unfunded defined-benefit pensions toward a funded, market-linked, defined-contribution model similar to 401(k)s in the US. The extra ₹50,000 deduction under 80CCD(1B) was added in 2015 to boost voluntary adoption.

Who it's best for

Anyone who has exhausted the ₹1.5L 80C limit and wants an additional tax deduction while building a retirement corpus.

Who should avoid it

You want full control/liquidity over your retirement savings — NPS mandates 40% goes into an annuity you can't touch as a lump sum.

Pros

• Extra ₹50,000 tax deduction beyond the regular ₹1.5L 80C limit
• Low fund management charges compared to most other market-linked products
• Some equity exposure allowed, unlike PPF/EPF which are pure fixed income

Cons

• 40% of the corpus must compulsorily buy an annuity at retirement — you can't take it all as cash
• Annuity income is taxed at your slab rate when received, unlike PPF/EPF withdrawals
• Fully illiquid until age 60 except for limited partial withdrawal reasons

Key ratios to check