NPS 2.0: Why the new 80% cash withdrawal rule makes it India’s top retirement asset

NPS 2.0: 2025 has emerged as a landmark year for the National Pension System (NPS), with a series of regulatory changes making it one of the most attractive retirement assets in India.

This enhanced withdrawal flexibility has made NPS far more appealing for individuals seeking a disciplined, low-cost, and long-term retirement solution.

Greater flexibility at exit

• Up to 80% lump sum withdrawal allowed at retirement

• Mandatory annuity purchase reduced to 20%

• Early exit permitted after 60 years of age or completion of 15 years of tenure

Multiple investment choices

NPS now offers three distinct investment approaches:

• Auto choice: Asset allocation adjusts automatically based on age

• Active choice: Investors can allocate up to 75% in equities

• Multiple Scheme Framework (MSF): Effective from 1 October 2025, this new option adds more diversification.

Additionally, the investment universe has expanded to include IPOs, REITs, InvITs, gold ETFs, and silver ETFs, while equity exposure limits have been relaxed.

Tax efficiency and cost advantage

60% of the withdrawal remains tax-free

Tax is applicable on the remaining portion, though experts expect further clarity once tax laws are amended.

"Currently, 60% of the withdrawal is tax-free, while tax is payable on 20%. However, this is expected to change once the Income Tax Act is amended," said Mumbai-based tax and investment expert Balwant Jain.

Low fund management charges and regulation by PFRDA further enhance the scheme’s credibility.

Employers can contribute up to 14% of an employee's basic salary to the National Pension System (NPS) in the new tax regime. With reduced requirements of only 20% for mandatory buying of annuity and lower fund charges, it has become attractive, especially for those in the old tax regime.

"NPS remains a low-cost product offering cumulative long-term benefits, especially for investors opting for the old tax regime," added Jain.

"With higher lump sum withdrawal allowed and a lower compulsory annuity requirement, subscribers now have better control over their retirement money. NPS also offers tax benefits at the time of investment and allows market-linked growth over the long term, which helps build a larger retirement corpus. Low fund management charges and regulated fund managers add to its reliability. Overall, NPS is now a strong option for anyone looking for a disciplined, tax-efficient, and well-structured retirement solution," said Abhishek Soni, CEO & Co-Founder, Tax2win.

Why NPS makes sense for retirement

NPS has developed into a well-structured retirement product that is appropriate for people wishing to accumulate a steady and substantial retirement corpus because of its increased withdrawal freedom, expanded investment possibilities, tax efficiency, and low expenses.