NPS explained: the low-cost pension account, in plain words

A pension is simply money that keeps coming in after you stop working. The National Pension System, or NPS, is one government-backed way to build that pot yourself, at a very low cost, while you are still earning. It is run under the pension regulator PFRDA and is open to most working Indians.

How it works. You put in money during your working years, as often as you like. That money is invested in a mix of equity (the stock market) and bonds, and you pick the mix or let it be set by your age. Because the charges are among the lowest of any investment product in India, more of your money stays invested and compounds.

What happens at 60. When you reach 60, you cannot simply take everything out. At least 40% of the built-up amount must buy an annuity, a product that pays you a regular pension for the rest of your life. The remaining part can usually be taken as a lump sum. These withdrawal limits have been changed more than once, so check the current PFRDA rules before planning around them.

The tax angle, and why people use it. On the old tax regime, NPS gives an extra deduction of up to 50,000 rupees, over and above the usual 1.5 lakh rupee tax-saving limit. That extra room is the main tax reason people add NPS on top of other options.

Did you know? The 50,000 rupee NPS deduction sits on top of the usual 1.5 lakh rupee limit, so on the old regime it can lower your taxable income by that much more. It applies only on the old regime, not the new one, so check which regime you are on before counting on it.

The trade-offs to weigh. NPS is low-cost and tax-friendly, but the money is locked until 60, and a chunk must become a pension rather than cash in hand. The return is market-linked, not guaranteed. That makes it a long-horizon retirement tool, not a flexible savings account. Many people use it alongside other tools rather than on its own.

The takeaway. NPS is a cheap, disciplined way to build a retirement pension, with a useful extra tax break on the old regime. The price of that is a long lock-in and a compulsory pension portion at the end. Know both sides before you open one.

More on retirement: the full retirement planning guide, PPF versus EPF, the two provident funds, and the idea that makes all of this work, compounding.