The Annuity Lock Is Now 20%. The Tax Break Is Now Zero.

Almost everything written about NPS is arguing about a scheme that stopped existing.

The two facts everybody knows — you get an extra ₹50,000 deduction and they force 40% of your money into an annuity — are both out of date. One died in April 2025. The other died in December 2025. And then, two weeks ago, a cost appeared that nobody has priced in yet.

Three dates did all the damage:

Read those together and the familiar debate inverts. The thing everyone complains about got fixed. The thing everyone sells NPS on got abolished. And the quiet advantage that was left — NPS was the cheapest managed equity exposure in India — just got 0.20 percentage points more expensive, which over a working life is not a rounding error.

I am an AMFI registered mutual fund distributor, so you should read my conclusions on a competing product with appropriate suspicion. That is exactly why every number below is live and every assumption is a control you can move. If you think I have tilted an input, change it and watch the verdict change.

1. The pitch that no longer exists

For a decade NPS was sold on one line: ₹50,000 of deduction over and above your ₹1.5 lakh. It was Section 80CCD(1B); under the Income-tax Act 2025 it is Section 124(3).

It still exists. It is just not available to most people any more.

The new tax regime is now the default, and it disallows own-contribution NPS deductions entirely. What survives under the new regime is only Section 124(1) — your employer's contribution, up to 14% of Basic + DA. Your own money into Tier 1 buys you nothing at all.

Then there is a second, quieter trapdoor. Because of the Section 87A rebate, a taxpayer with taxable income up to ₹12 lakh under the new regime pays zero tax. A deduction can only be worth something if there is tax to remove. For a very large slice of the salaried population, the NPS tax benefit is not small — it is arithmetically nil.

Move the controls. The engine works out what your contribution actually earns you in tax, then follows it all the way to age 60.

Set it to the new regime and watch the first line: tax relief, ₹0. That is not a modelling choice, that is the statute. A new-regime taxpayer putting their own money into NPS Tier 1 is not buying a tax benefit. They are buying a cheap fund with a lock on it.

Which raises the obvious question: is the fund cheap enough to be worth the lock?

2. The complaint that no longer exists

Here is the part almost nobody has noticed.

The PFRDA (Exits and Withdrawals under the National Pension System) (Amendment) Regulations, 2025 were gazette-notified on 15 December 2025, and they rewrote the exit. For non-government subscribers on a normal exit, the mandatory annuity dropped from 40% of the corpus to 20%. You can now take up to 80% as a lump sum or as a systematic withdrawal.

Several other locks came off at the same time:

• The vesting condition for private subscribers became 15 years or age 60, whichever comes first. Reporting on whether the separate five-year minimum lock-in survives for a premature exit is genuinely contradictory, so confirm that one with your CRA before you plan around it.
• A corpus up to ₹8 lakh can now be withdrawn in full, with no annuity at all — the old threshold was ₹5 lakh.
• Between ₹8 lakh and ₹12 lakh, up to ₹6 lakh comes out as a lump sum and the balance as periodic payouts over at least six years.
• Annuity purchase can be deferred to age 85, and government subscribers may now stay invested until 85.
• Partial withdrawals: four before 60 at four-year intervals, three after 60 at three-year intervals.

Government employees were left where they were: 60% lump sum, 40% annuity.

So the single loudest criticism of NPS is now substantially wrong. Good news — except the tax law did not move with it.

PFRDA lets you take 80%. The Income-tax Act exempts 60%. The exemption — Section 10(12A) of the 1961 Act, carried into the Income-tax Act 2025 — is capped at 60% of the amount payable. Nothing in Budget 2026 changed it. Take the full 80% and the slice between 60% and 80% is ordinary income, taxed at your slab in the year you receive it.

The new freedom is real. It is just partly taxed. Move the corpus and watch which rule catches you:

Notice what the router does at the top of the range. On a ₹2 crore corpus, taking the maximum 80% means volunteering ₹40 lakh of fully taxable income into a single financial year — which, at the top slab, hands over roughly ₹12.5 lakh. A mutual fund corpus of the same size has no such cliff: you redeem what you need, when you need it, and the ₹1.25 lakh long-term exemption resets every April.

That is the asymmetry worth internalising. NPS gives you one exit. Funds give you thirty.

3. The cost that just appeared

NPS's real argument was never the ₹50,000. It was price. Investment management fees of 0.03%–0.12% made it the cheapest managed equity exposure available to an Indian retail investor by a wide margin.

On 1 October 2026, under circular PFRDA/2026/46/REG-POP/08 dated 28 August 2026, that changed. Point of Presence charges were restructured from a cut of each contribution into an annual 0.20% of assets under management, adjusted through NAV and paid quarterly, plus a one-time ₹200 onboarding fee per PRAN.

Here is the running cost of a non-government Tier 1 account now:

CRA record-keeping charges sit on top as flat rupee amounts, and the management fee slides down to 0.04% as a pension fund's assets grow past ₹1.5 lakh crore. Round it to a third of a percent a year, up from an eighth.

NPS is still cheaper than a mutual fund. That has not changed and I am not going to pretend otherwise. What changed is the size of the gap — and since the tax deduction is gone for new-regime taxpayers, the gap is now the entire case for the product. The red line at the bottom of the first engine prices it: on the default settings, the October change alone costs that investor about ₹5.1 lakh by age 60.

One more caveat on returns, because it matters for anyone comparing track records. The ten-year Scheme E numbers on the NPS Trust site, as of 25 August 2026, read: HDFC Pension 12.98%, ICICI Prudential 12.87%, Kotak Mahindra 12.70%, UTI Retirement Solutions 12.50%, LIC Pension 11.65%, SBI Pension 11.61% — against a benchmark of 13.12%. Two things follow. Not one of the six beat its benchmark. And every one of those NAVs was computed before the PoP charge existed. Future returns carry 0.20% more drag than that record shows.

4. The annuity, priced honestly

Twenty per cent is a much smaller lock than forty. It is still a lock, and it is the part of NPS that gets hand-waved the most, so let us price it.

A 60-year-old buying LIC's Jeevan Akshay-VII on the return-of-purchase-price option is quoted roughly 6.4% to 6.7% a year right now. Call it 6.5%. Three things are true about that 6.5% simultaneously:

A level annuity at 6.5%, taxed at the top slab, is a product with approximately zero real return on day one and a negative one for every year after. That is not a scandal — it is what a lifetime guarantee costs, and the insurer is taking longevity risk you would otherwise carry alone. If you are genuinely frightened of outliving your money, that is a rational thing to buy.

But be clear about what you are buying. It is insurance, not investment. And NPS makes you buy some of it whether you want it or not.

The honest way to read the first engine, then, is this. NPS does produce the bigger corpus — a third of a percent compounds better than one percent, and on the default settings it finishes at ₹1.46 crore against ₹1.30 crore. But part of that bigger number arrives as a locked annuity paying a real return of roughly nothing, and once you look only at money you can spend, the fund route is ahead by about ₹8 lakh.

Drag the expense ratio slider and you can find the exact price of the lock. On the default assumptions, the fund route stays ahead on spendable cash until its expense ratio passes roughly 1.45%. Below that line, everything NPS has over a fund portfolio is the annuity slice — which is to say, it is not spendable at all.

5. The one bracket where NPS wins outright

Everything above is about your own money. Now the exception — and it is a big one.

Section 124(1) of the Income-tax Act 2025 — old Section 80CCD(2) — lets your employer put up to 14% of Basic + DA into your NPS Tier 1 account. That contribution:

• is deductible under both regimes, making it the only NPS tax benefit a new-regime taxpayer can get;
• sits over and above the ₹1.5 lakh and ₹50,000 limits entirely;
• never appears in your taxable salary, so it is not income that you then invest — it is income you never received.

That last point is the whole ball game. No mutual fund can do it. A fund can only ever invest money that has already been taxed. At the 31.2% effective top rate, employer NPS starts with ₹1.45 of capital for every ₹1 the salary route gets to invest — and then compounds that head start for twenty-five years at a lower expense ratio.

This engine routes a slice of Basic + DA two ways: into NPS, or out as taxable salary and into funds. Same employer cost, both sides.

On the defaults — ₹12 lakh of Basic + DA, 14% routed, 25 years, top slab — NPS finishes ₹77 lakh ahead, and ₹36 lakh of that is spendable cash before you count the annuity at all. There is no fee argument, no exit-tax argument and no asset-allocation argument that closes a gap that size. The money was simply never taxed.

Now slide the marginal rate down to zero and watch the bars invert. At a nil effective rate — which, remember, is everyone with taxable income up to ₹12 lakh under the new regime — the deduction is worth nothing, so the salary route invests the whole amount, and NPS's advantage collapses to the fee gap alone. For that person NPS is handing over liquidity, a 75% equity cap and a 20% annuity mandate in exchange for about a third of a percent a year. That is a bad trade.

So the answer to the question in the title is specific: NPS clearly wins for the salaried employee in the 30% bracket whose employer will route Basic + DA into Tier 1. Not the 30% bracket on its own. The 30% bracket with an employer contribution.

Two limits on that win, both worth knowing:

• Employer contributions to EPF, NPS and superannuation are capped in aggregate at ₹7.5 lakh a year. Beyond that the excess is a taxable perquisite under Section 17(2)(vii) — and the returns earned on the excess are taxed annually too, under 17(2)(viia). If you already have a large EPF contribution, you have less NPS headroom than 14% suggests.
• The win is entirely on the way in. That money still faces the same 60% exemption cap, the same 20% annuity mandate and the same lock until 60. You are getting untaxed capital, not an untaxed exit.

6. What you are actually choosing

Say the employer case applies to you, or the old regime does, and you are opening an account. Nobody tells you that "open an NPS account" is really seven separate decisions, that three of them barely matter, and that one of them is irreversible for the rest of your life.

Here they are, in the order the forms ask. Tap any row.

Three of those seven are now effectively free choices, and that is new. Since 1 October 2026 every Point of Presence charges the same 0.20% a year, so where you open the account no longer affects what you pay — only the quality of service you get when something goes wrong. The CRA is portable. The pension fund manager can be changed once a financial year at no cost and with no tax event.

The one that cannot be undone is the last one, and it is the one you will think about least: the annuity provider. You pick it once, at 60, in a single form, and it governs the income on a fifth of your corpus until you die.

The glide path nobody shows you

Decision five — Active or Auto — is where most of the money is decided, and it is almost always chosen in thirty seconds.

Auto Choice puts you on a life-cycle fund that sells equity down automatically as you age. There are four, and the differences are much larger than their names suggest. Active Choice lets you set the mix yourself, capped at 75% equity until 50, then tapering.

This lab runs all five options year by year, moving the allocation exactly as the published tables do, and prices the result.

On the defaults — age 32, ₹10,000 a month — the spread between the best and worst of these five options is about ₹71 lakh, roughly 67% more corpus for no extra rupee contributed. Push the contribution to ₹25,000 and the spread passes ₹1.7 crore. That is a far bigger decision than the ₹50,000 deduction ever was, and it is the one made with the least thought, usually by accepting whatever the form had pre-selected.

Then there is the result I did not expect. BLC, the one called "Balanced", beats LC75, the one called "Aggressive" — at every single starting age I tested. From 32 it finishes ₹14 lakh ahead; from 25, ₹19 lakh ahead.

The reason is in the shape of the taper, not the starting point. LC75 does open at 75% equity, but it dumps equity fast: 55% by 40, 35% by 45, and 15% by 55. BLC starts at only 50% and simply refuses to move until 45, still holding 35% at 55. Averaged over a working life, the fund that never gets aggressive holds more equity than the one named for it. A label chosen by its first year misdescribes the whole path.

Which points at the real problem with all four. By 55, LC75 has you at 15% equity, LC50 at 10%, LC25 at 5% — only BLC is still meaningfully invested. If you retire at 60 and live to 85, those defaults have you funding thirty years of retirement out of a portfolio that effectively stopped growing in your mid-fifties.

What is actually inside the box

Your money goes into asset classes, not funds. After the December 2025 merger there are three, not four.

That first row is the one that matters, and it rarely gets quoted. Ninety per cent of Scheme E has to sit in the top 200 stocks by market capitalisation. Scheme E is not "equity" in the sense a fund investor means it. It is structurally a large-cap fund, by regulation, permanently.

So here is the honest ledger of what you cannot buy inside NPS, no matter which of the eleven managers or five categories you pick:

The naming trap you will walk into

One last thing, and it is going to cause real mistakes.

On 28 August 2026, circular PFRDA/2026/47/REG-PF/10 standardised how schemes under the Multiple Scheme Framework are named and classified. Every such scheme now falls into one of five categories, A to E, by equity exposure, and the category letter goes into the scheme's name — "XYZ NPS A Retirement Scheme", and so on. Each pension fund may offer up to two schemes per category per tier.

Now look carefully at what the letters mean:

For fifteen years, "Scheme E" in NPS meant equity — the most aggressive thing you could buy. Under the new framework, "Category E" means almost no equity at all — the most conservative. The same letter now sits at opposite ends of the risk scale depending on which document you are reading.

If you are picking a scheme from a list on an app, read the equity percentage, not the letter. The asset classes E, C and G still exist and still mean what they always did; the A-to-E categories are a separate labelling layer sitting on top of the Multiple Scheme Framework. Two systems, five overlapping letters, one of them inverted.

One more thing about Tier 2

Tier 2 is offered on the same form and is usually explained as "the flexible one". It is: ₹1,000 to open, ₹250 a contribution, no lock-in, withdraw any day, and up to 100% equity — no 75% ceiling.

The part that gets left out is the tax. For anyone who is not a central government employee, Tier 2 gets no deduction going in, and its gains are added to your income and taxed at your slab rate on withdrawal — not at 12.5% as capital gains, with no ₹1.25 lakh exemption and no long-term concession at all.

So Tier 2 is an equity product carrying worse-than-debt-fund tax treatment. At the 30% slab you would hand over 31.2% of your gains where a fund would have charged 13%. There is very little case for it over a plain mutual fund, and the flexibility it advertises is the one thing a mutual fund already does better.

7. What is actually left

Strip away a decade of accumulated sales copy and NPS Tier 1 in October 2026 is this:

That last row is the one genuine NPS advantage nobody talks about, and it survives everything above. Inside Tier 1 you can move from one pension fund manager to another, or rebalance equity down as you approach 60, without triggering a single rupee of capital gains tax. In a mutual fund portfolio, every rebalance is a sale. Over a thirty-year glide path that is worth real money.

8. What I tell people

Four cases, and they cover nearly everybody.

Your employer offers corporate NPS and you are in the 30% bracket. Take it, up to the 14% limit, watching the ₹7.5 lakh aggregate cap. This is the clearest free lunch in Indian personal finance and it is not close. Then build everything else — your emergency fund, your goals, your actual flexibility — outside it.

You are on the new regime with no employer NPS. Your own contribution buys you a cheap fund with a lock, a 75% equity ceiling and a forced annuity. If you are the kind of investor who sells in a crash, that lock may genuinely be worth more to you than the flexibility you are giving up — behaviour costs most people far more than any expense ratio ever will. If you are not, a plain fund portfolio does the same job and lets you reach it.

You are on the old regime with 80C headroom. The ₹50,000 under Section 124(3) is still real money — ₹15,600 back at the top slab. Take it. Just size it as what it is: a ₹50,000-a-year decision, not a retirement plan.

Your taxable income is under ₹12 lakh. Every NPS tax benefit available to you is worth exactly zero rupees. Do not let anyone sell you one. Build the emergency fund first, then invest for growth somewhere you can actually reach it.

And one thing that applies to all four: whatever the product, the expense ratio is the smallest number in the decision. The gap between a good plan held for thirty years and a good plan abandoned in year four dwarfs every fee on this page. Judge what you pay by whether it buys you the help to stay invested — that is the comparison that actually determines how much money you end up with.

The scheme got better in December and more expensive in October. Both facts are two weeks to ten months old, and almost nothing you will read about NPS has caught up with either.

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Sources

All figures above come from these, checked on 15 October 2026:

• PFRDA, Press release — key amendments, Exit Regulations and the PFRDA (Exits and Withdrawals under the National Pension System) (Amendment) Regulations, 2025, gazette-notified 15 December 2025 — pfrda.org.in, summarised at Upstox and Outlook Money
• PFRDA circular PFRDA/2026/46/REG-POP/08 dated 28 August 2026, revised PoP charges effective 1 October 2026 — TaxCorp, Zee Business
• PFRDA revised investment management fees effective 1 April 2026 — Angel One
• NPS Trust Scheme E Tier 1 ten-year returns to 25 August 2026 — Upstox
• Income-tax Act 2025, Section 124 (NPS deductions, replacing 80CCD) — bharattax.co; 60% exit exemption and the 60–80% mismatch — 1 Finance
• 80CCD(1B) unavailable under the new regime; 80CCD(2) at 14% under both — Policybazaar, ClearTax
• Budget 2026 left slabs, rebate, surcharge and cess unchanged for FY 2026-27 — Business Today
• ₹7.5 lakh aggregate employer-contribution cap, Section 17(2)(vii) and (viia) — Angel One
• LIC Jeevan Akshay-VII annuity rates, return-of-purchase-price option at 60 — LIC sales brochure
• PFRDA circular PFRDA/2026/47/REG-PF/10 dated 28 August 2026, standardised A-to-E scheme classification and naming — StaffNews, Govt Staff
• Asset class A merged into C and E, switching window closed 25 December 2025 — CAalley
• Scheme E investment universe, top-200 requirement and the 5% derivative and REIT/AIF/ETF sub-limits — PFRDA Master Circular on Investment Guidelines under NPS, Non-Government Sector — pfrda.org.in, summarised at GConnect
• Auto Choice LC75 / LC50 / BLC / LC25 age-wise allocation tables — TaxGuru, HDFC Pension
• Eleven pension fund managers; SBI, LIC and UTI alone for government money — Business Today
• Three CRAs and their charges; one PFM change a financial year — Outlook Money, Alankit
• Tier 1 vs Tier 2 minimums, Tier 2's 100% equity allowance and its slab-rate taxation — Zerodha Varsity, Protean eGov

Every engine on this page assumes level contributions with no annual step-up, a 7.5% return on the NPS corporate-bond and gilt portion, annuity at 6.5%, and marginal relief on surcharge ignored. Projections are illustrations, not forecasts.