Big news for NPS subscribers. If you have been putting money into the National Pension System, you need to know about this. The rules changed in 2026 and honestly, I think it is one of the best things that has happened to retirement planning in India.
Here is the headline. You can now withdraw up to 80% of your corpus as lump sum when you turn 60. Before this, you could only take 60% out. The rest had to go into an annuity, which meant locking your money with an insurance company for a fixed monthly payout. A lot of people hated that. Annuities in India have not been great. The returns are modest and once you buy one, you cannot change your mind. So the fact that you now only need to put 20% into an annuity is a relief. You get more control over your own money.
But here is the catch. Only 60% of your withdrawal is tax-free under Section 10(12A). The extra 20% you pull out, the part that used to go into the annuity, is taxable at your slab rate. So you get more freedom, but you pay for it. If you are in the 30% slab and you withdraw a big chunk, that extra 20% could mean a decent tax hit. In my opinion, it is still worth it. You would rather pay tax and have the money in your hands than lock it in a low-yield annuity you cannot touch. But do the math for your own situation. If your corpus is small and your tax slab is high, maybe keeping more in the annuity makes sense. For most people, I think the flexibility wins.
Let me clear up the Tier 1 and Tier 2 confusion because a lot of people get this wrong. Tier 1 is the real pension account. This is where you get the extra Rs 50,000 deduction under 80CCD(1B) on top of your 80C limit. That is a big deal. But Tier 1 is locked till you turn 60. You cannot withdraw early except in very specific situations like critical illness or buying a house. Tier 2 is different. It is basically a cheap mutual fund with no lock-in and no tax benefit. You can put money in, take it out anytime, and there is no 80CCD deduction. Think of Tier 2 as a flexible savings bucket that happens to sit inside the NPS portal. Useful if you want low-cost equity exposure without the commitment of Tier 1.
I think NPS Tier 1 is now one of the best retirement tools we have. Here is why. You get tax deduction on the way in. You get low-cost equity and debt exposure. The fund managers are regulated and the fees are capped. And now you get to keep 80% of your corpus as lump sum at 60. Yes, part of that extra 20% is taxable. But you can invest that lump sum however you want. You could put it in a mix of FD, debt funds, and equity. You could use it to pay off your home loan. You could keep some for emergencies. The point is, the choice is yours. That is what I like about the new rules.
One more thing. If you have not started NPS yet, do not wait. The power of compounding works best when you start early. Even 5,000 rupees a month in Tier 1 from age 25 can add up to a serious corpus by 60. And that Rs 50,000 extra deduction every year is free money from the taxman. Use it. Your future self will thank you.