NPS is the National Pension System. You contribute while you work. The money is invested in the pension funds you chose. 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 corpus can be paid out and part buys an annuity.
The tax on the way in is easy to mix up. Your own contribution, inside ₹1,50,000, is section 123 read with Schedule XV. That was section 80CCD(1). An extra ₹50,000 is section 124(3), which was section 80CCD(1B). An employer’s contribution is section 124, which was section 80CCD(2): 14% of salary for government, 10% for other employers, and 14% if you are taxed under section 202.
Section 202 keeps the employer deduction and drops section 123 and section 124(3). The new regime does not give you ₹1,50,000 or the extra ₹50,000 for your own NPS. It does allow the employer’s share, within the cap.
At a non-government exit at 60, at least 20% buys an annuity if the corpus is above ₹8,00,000, and up to 80% can be a lump sum. Schedule II exempts a lump sum only up to 60% of the corpus. An 80% lump sum does not make the extra slice exempt. The pension is taxed when it is paid.
A worked example
The NPS calculator’s starting point is ₹5,000 a month from age 30, at a planning return of 10%, with 40% of the corpus used to buy an annuity at 6%. None of those rates is notified. They are inputs.
The corpus is ₹1,13,96,627. The lump sum is ₹68,37,976. The tax-free cap at 60% of the corpus is ₹68,37,976, so the taxable lump sum is ₹0. The annuity purchase is ₹45,58,651. The planning pension is ₹22,793 a month. Buying the annuity is not itself taxed that year. The pension is taxed when it arrives. The NPS calculator is that projection. The NPS guide is the rule. The regime guide is where the employer share still matters.
Mistakes people make
- Calling NPS tax-free because PPF is.
- Claiming your own ₹50,000 in the new regime.
- Taking an 80% lump sum and assuming all of it is exempt. The exempt slice is 60%.
- Treating the 10% planning rate as a PFRDA promise.
- Opening Tier II and claiming Tier I deductions on it.
The section
Own contribution: section 123 (this was section 80CCD(1)). Extra ₹50,000: section 124(3) (this was section 80CCD(1B)). Employer: section 124 (this was section 80CCD(2)). The lump-sum exclusion is Schedule II (this was section 10(12A)). The pension is taxed under section 124(6) when it is paid.
Questions
Is NPS tax-free like PPF?
No. PPF maturity is excluded under Schedule II. NPS is EET. A lump sum is exempt only up to 60% of the corpus. The pension is taxed when it is paid. In the example the lump sum of ₹68,37,976 is fully inside that 60% line, so the taxable lump sum is ₹0.
What survives in the new regime?
Your own contribution under section 123 and the extra ₹50,000 do not. An employer’s contribution can, at 14% of salary when you are taxed under section 202. In the old regime a private employer’s share is capped at 10%.
Do I have to buy an annuity?
At a normal non-government exit, at least 20% of a corpus above ₹8,00,000 buys an annuity, and up to 80% can be a lump sum. A corpus of ₹8,00,000 or less can be taken entirely in cash.
Sources
Figures checked 28 Oct 2026.