How the NPS corpus and annuity work
The National Pension System is a market-linked retirement account. You contribute monthly until 60, the money is invested across equity, corporate bonds, and government securities according to your chosen allocation, and at exit part of the corpus must be converted into a pension-paying annuity.
The 40% annuity rule changes the outcome
At exit you can normally withdraw up to 60% of the Tier I corpus as a lump sum, while at least 40% must buy an annuity that pays you a pension for life. This is the single most important feature to understand before comparing NPS with a mutual fund portfolio.
On a ₹2.28 crore corpus, that means roughly ₹1.37 crore in hand and about ₹91 lakh converted to an annuity. At a 6% annuity rate, the pension works out to around ₹45,600 a month before tax.
Why the equity allocation matters
NPS caps equity exposure in Tier I at 75% under the active choice, and the auto choice tapers equity down as you approach 60. A young subscriber on the aggressive lifecycle fund therefore starts near that cap and ends far more conservative.
That glide path lowers your expected return in the final decade, which is prudent for retirement money but means a flat 10-12% assumption across 30 years is optimistic. Running the calculation at 9-10% gives a more defensible figure.
The tax position is its main advantage
Employer contributions to NPS under section 80CCD(2) are deductible within limits and remain available under the new tax regime, which is unusual. The additional deduction of up to ₹50,000 under 80CCD(1B) applies to the old regime.
At exit, the lump sum portion has historically been tax-exempt while annuity income is taxed as income in the year you receive it. Rules evolve, so confirm the current treatment before finalising a retirement plan around them.
Charges and liquidity
NPS fund management charges are among the lowest available in India, which compounds into a real advantage over three decades. The trade-off is liquidity: Tier I money is locked until 60 apart from limited partial withdrawals for specified purposes after three years.
If you want the same low-cost exposure without the lock-in and annuity requirement, an index fund portfolio is the usual alternative. Many people use both — NPS for the employer deduction, mutual funds for flexibility.
Example: ₹10,000 a month from age 30 to 60 at 10%
- Monthly contribution
- ₹10,000
- Assumed return
- 10% p.a.
- Contribution period
- 30 years
- Total contributed
- ₹36,00,000
- Corpus at 60
- ≈ ₹2.28 crore
- Lump sum (60%) / annuity (40%)
- ≈ ₹1.37 crore / ₹91 lakh
The annuity portion at a 6% rate would pay roughly ₹45,600 a month before tax. Reducing the return assumption to 9% lowers the corpus to about ₹1.84 crore, which is why the assumption deserves as much attention as the contribution.