What the NPS pays out
The National Pension System does not hand you your balance at sixty. What the withdrawal rules require, what the small-corpus exemption changes, and the question people ask too late.
Project a monthly investment to retirementThe rule people find out about at fifty-nine
At a normal exit at sixty, at least 40% of your accumulated NPS corpus has to be used to buy an annuity. It is not a suggestion or a default; you cannot take the whole balance as cash, and the remaining 60% is the most you can withdraw.
This is the single most important fact about the scheme and the one least likely to be understood by somebody who signed up for the tax deduction. A corpus of ₹1 crore is not ₹1 crore of money at sixty. It is ₹60 lakh of cash and ₹40 lakh converted into a monthly payment at whatever rate an insurer is quoting on the day.
The exemption that changes the answer entirely
If the corpus at exit is at or below ₹5,00,000, the whole amount may be withdrawn and no annuity is required. That threshold was raised from ₹2,00,000, and it matters far more than its size suggests: somebody who contributed modestly for a few years is in an entirely different position from the illustration above.
It is worth knowing which side of the line you are on well before you get there, because contributing a little more or a little less in the final years can move you across it.
The annuity rate is the number nobody can tell you
Every NPS projection you will ever see, including this site's, asks you to assume an annuity rate. Nobody is quoting you one. Annuity rates are set by insurers at the moment of purchase and move with long-term interest rates, so the rate available when you retire is genuinely unknown today.
The consequence is worth stating plainly: the pension figure in any NPS projection is the product of two assumptions stacked on each other - a return over decades and a rate at the end of them. The corpus figure is one assumption. The pension figure is two, and it should be read accordingly.
| Annuity rate | Monthly pension |
|---|---|
| 5% | 16,667 |
| 6% | 20,000 |
| 7% | 23,333 |
| 8% | 26,667 |
Leaving early reverses the split
An exit before the normal exit age is not the same transaction. Rather than 40%, at least 80% of the corpus must be annuitised, leaving 20% as cash - which makes early exit a considerably worse deal than most people assume when they think of it as an emergency option.
Partial withdrawals during accumulation are permitted in defined circumstances and against defined limits, which is a different mechanism from exiting and is worth looking at first.
How to think about the 40%
The requirement exists because the scheme is a pension rather than a savings account, and the state's interest is in nobody spending their retirement in the first five years of it. Whether that is the right trade for you depends on what else you have.
For somebody whose NPS is their only retirement provision, a guaranteed monthly payment for life is close to the point of the exercise. For somebody with a house, a provident fund balance and other investments, being obliged to convert a chunk of it at whatever rate is available in one particular month is a real constraint, and it is the argument people make against the scheme.