In today’s Finshots, we explain all the new changes to the National Pension System (NPS), the government backed retirement savings scheme.

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Now, on to today’s story.

The Story

Most of us are good at planning for the next month. With New Year’s around the corner and 2026 coming up, we might even be great at planning for the next year. But talk about retirement, and it sits in a strange blind spot— important enough to acknowledge but distant enough to postpone.

And yet, for most people, financial freedom in retirement doesn’t mean being rich. It simply means having access to your own money when you need it the most.

In India, that responsibility often falls on the National Pension System, or NPS. Put simply, NPS is a government-backed retirement savings scheme where individuals can choose to set aside a portion of their income every month. That money is then invested over time, and compounding does the heavy lifting in the background. The idea is that by the time you stop working, you’ve built a corpus that can support you through the years when paycheques stop.

And this system itself isn’t new. It began in 2004, but only for central government employees. They contributed 10% of their salary, which the government matched. Over time, state governments adopted it, and in 2009, NPS was finally opened up to all Indian citizens.

From the very beginning, though, NPS came with a clear philosophy: this money is for life after work. Which is why it actively discouraged early access.

That philosophy showed up most clearly in the 2015 rules. Withdrawals were tightly controlled. For example, if you had to withdraw from your NPS for any medical illnesses, it had to fall into a bucket of 13-15 critical illnesses to qualify. Lump sum withdrawals for any reason were limited.

And at retirement, the rules were rigid. Under the earlier framework, at least 40% of your retirement corpus had to be locked into an annuity, and the remaining 60% could be taken out as a lump sum. That means you’re only truly getting 60% of the total pension when you retire, and the rest has to be reinvested. An annuity, in simple terms, is a product where you hand over a lump sum to an insurer and receive guaranteed payments for the rest of your life.

On paper, this made sense. The pitch was comforting: steady income, no matter how long you lived. But the world these rules were written for no longer exists.

Retirement today doesn’t look like a clean break at 60. Healthcare costs are higher. People take up second careers. Family responsibilities stretch well into later years. And the cost of living has quietly climbed.

In that context, rules designed as protection began to feel more like restriction.

Which brings us to December 2025. That’s when the Pension Fund Regulatory and Development Authority (PFRDA), the regulator that oversees NPS, rewrote the exit rules, to acknowledge how retirement actually works today..

The most visible change is around withdrawals. If your total NPS corpus is ₹8 lakh or less, you can now withdraw it entirely. Between ₹8–12 lakh, you can withdraw up to ₹6 lakh. And above ₹12 lakh, the cap is set at 80% (or 60% if you’re a government employee). And in all scenarios, you have the option to purchase an annuity using up to 20% of your NPS savings (or up to 40% if you’re a government employee). In other words, for many retirees, access to their own savings has expanded meaningfully.

But that naturally raises the next question. What happens to the rest of the pension?

Here, too, the rules have softened. The compulsory annuity requirement has been reduced from 40% to 20%. The remaining amount stays with the retiree, who can decide how best to use it. This shifts the system away from forced reinvestment and toward personal choice, while still preserving a guaranteed income stream.

The framework has also been updated to reflect longer working lives. By extending the maximum age limit from 75 to 85, the system now acknowledges that people are living longer, working longer, and retiring more gradually than before.

Then there’s a change that addresses a very practical problem — liquidity. Say you invest in gold, mutual funds, property, etc. instead of a pension scheme. These assets also work as collateral against loans, should the need arise. But, NPS wasn’t a part of this list until now. That has changed. Retirees can now take loans against their pension, up to 25% of their own contributions. For someone facing an unexpected expense without wanting to break their retirement structure entirely, that matters.

Another long-standing pain point of any pension scheme is what happens when the subscriber is no longer around to manage it. These systems are, after all, designed for old age. And in many cases, families may be completely unaware that an account even exists. Add paperwork and verification delays, and it’s not uncommon for pension money to remain untouched for years.

To address this, the revised rules introduce a provision for cases where a subscriber is presumed missing. Under this framework, up to 20% of the accumulated corpus can be paid out to nominees early, offering immediate financial support. The remaining amount is settled once the subscriber is officially declared deceased. It may not be a dramatic change, but for families stuck in uncertainty, it can make a real difference.

The new rules also recognise that life doesn’t always follow a straight line. Earlier, if someone renounced Indian citizenship or needed to access money for housing without waiting for retirement, exiting NPS wasn’t straightforward.

But under the revised 2025 exit norms, there’s clarity. If a subscriber renounces their Indian citizenship, they are required to inform the pension authorities and can close their NPS account and withdraw the entire accumulated corpus as a lump sum, instead of being forced into annuities or partial exits.

The same applies to personal liquidity before retirement. Of course, NPS allowed partial withdrawals earlier, but they were limited to specific conditions. The new rules have just expanded on the list of withdrawal purposes. There are caps and conditions of course, but it sends one message: money saved over decades can be accessed more reasonably for major life events.

Now, on paper, these look like landmark changes to the country’s pension system. But they don’t remove guardrails entirely.

If you look at the original rules, they weren’t accidentally strict. It was designed to restrict subscribers to protect them from one of the biggest risks with respect to pension: outliving your own savings. Sure, the mandatory annuity limit has dropped but it ensured a steady income irrespective of how long retirement lasted.

But now with larger withdrawals, lower annuity locks, and easier access through loans, more responsibility now sits with the subscriber. And if you look at it that way, NPS starts to look less like a locked pension and more like a system that trusts individuals to make judgement calls. And that trust can cut both ways.

Globally, NPS is often compared to the US 401(k). And the similarities are real. Both are long-term, market-linked retirement savings systems. But their tax treatment differs. In the US, retirement accounts like the Roth 401(k) are funded with after-tax dollars and allow qualified withdrawals in retirement to be completely tax-free, unlike traditional 401(k) plans where withdrawals are taxed as income.

NPS, on the other hand, is tax-efficient but not fully tax-exempt. Up to 60% can be withdrawn tax-free at retirement. But the rest, such as annuity income and larger lump sums beyond the exempt portion can be taxable. As exit flexibility increases, this tax gap becomes more important for planning.

That said, the new NPS rules don’t magically fix retirement planning. They simply offer more choice — and with it, more responsibility. Subscribers now have greater control over how and when they access their savings, but also carry a larger share of the risk that comes with those decisions.

And perhaps that’s the real shift. NPS is no longer just about protection. It’s about judgement.

So yeah, if the framework works for you, the flexibility helps. If it doesn’t, you aren’t locked in since NPS remains voluntary for most of us. And in a retirement system that’s slowly adapting to real life, that freedom may be its biggest change of all.

Until then…

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