NPS for Salaried Freshers: Tiers, Tax and Withdrawal Rules
What NPS is, how Tier I and Tier II differ, how employer NPS is taxed in FY 2026-27 under both regimes, and the exit and withdrawal rules after 2025.
Last updated: 12 October 2026 · By the Asuraa Team
Quick answer: The National Pension System (NPS), regulated by PFRDA, is a retirement account. Tier I is the locked pension account; Tier II is an optional, flexible account. For FY 2026-27, the new regime allows a deduction only for employer contributions (up to 14% of basic plus DA). The old regime also allows your own contribution, including an extra Rs 50,000. This is general information, not financial advice.
Key takeaways
- NPS is a PFRDA-regulated retirement account; Tier I is the main pension account with exit rules, Tier II is an optional account you can withdraw from freely.
- Under the new regime for FY 2026-27, only the employer's NPS contribution is deductible, up to 14% of basic pay plus DA, within an overall Rs 7.5 lakh cap.
- Under the old regime, your own contribution counts within the Rs 1.5 lakh limit, plus an extra Rs 50,000; employer contribution is deductible up to 10%.
- From December 2025 PFRDA rules, non-government subscribers can take up to 80% as lump sum at normal exit, with at least 20% used to buy an annuity.
- Early exit before normal exit age requires at least 80% in an annuity unless the corpus is Rs 5 lakh or less, so treat Tier I as long-term money.
This is general information, not financial advice. Tax and PFRDA rules change, so confirm the current position with your employer, your NPS intermediary and the official sources before acting.
What NPS is
The National Pension System (NPS) is a retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). You get a Permanent Retirement Account Number (PRAN). Money you and your employer put in is invested by pension fund managers in equity, corporate bonds and government securities, in a mix you choose or an automatic option based on age. Returns are market-linked and not guaranteed.
Private-sector employees usually join through the corporate model, where the employer has registered with NPS and deducts contributions through payroll. You can also open an account yourself under the all-citizen model.
Tier I vs Tier II
| Feature | Tier I | Tier II |
|---|---|---|
| Purpose | Retirement (pension) account | Optional savings account |
| Who can open | Any eligible subscriber | Only someone with an active Tier I |
| Withdrawals | Restricted; partial withdrawals only for set purposes | No lock-in for most subscribers |
| Tax deduction on contributions | Yes, within limits (see below) | Generally none for private-sector employees |
| Annuity at exit | Required above certain corpus levels | Not required |
Tier II works more like a flexible investment account inside NPS. The tax treatment of Tier II gains is not spelled out as clearly as Tier I, so check with a tax professional if you use it.
Employer contribution: how it works
Some companies offer NPS as part of CTC. The employer pays a percentage of your basic pay (plus DA, if any) into your Tier I account. Two things to know:
- It is usually part of your CTC. Moving money to NPS often reduces another component, so your in-hand pay may change. Ask HR for the revised break-up and read it with our salary slip guide.
- There is an overall cap. Employer contributions to NPS, EPF and superannuation funds above Rs 7.5 lakh a year in total are taxed as a perquisite. Freshers are rarely near this limit. See PF and gratuity explained for the EPF side.
Tax treatment for FY 2026-27 (old vs new regime)
The Income-tax Act, 2025 applies from 1 April 2026, so FY 2026-27 (tax year 2026-27) uses new section numbers. Reports on the new Act say the NPS deduction now sits in Section 124 (it was Section 80CCD under the 1961 Act), with the limits unchanged. The new regime itself is in Section 202 (formerly 115BAC).
| NPS item (FY 2026-27) | New regime (default) | Old regime |
|---|---|---|
| Employer contribution to Tier I | Deductible up to 14% of basic plus DA | Deductible up to 10% of basic plus DA (14% for government employers) |
| Your own contribution | Not deductible | Deductible up to 10% of salary, within the overall Rs 1.5 lakh limit |
| Extra deduction for own contribution | Not available | Additional up to Rs 50,000 above Rs 1.5 lakh |
| Tier II contributions | Not deductible | Generally not deductible for private-sector employees |
The new regime is the default for salaried individuals; you choose the old regime with your employer for TDS and when filing. Your Form 16 will show the deductions your employer allowed.
Lock-in, exit and withdrawal rules
PFRDA amended its exit and withdrawal regulations in December 2025. For non-government subscribers (all-citizen and corporate), the main points reported are:
| Situation | What the rules allow |
|---|---|
| Normal exit, corpus above Rs 12 lakh | Up to 80% lump sum; at least 20% used to buy an annuity |
| Normal exit, corpus Rs 8 to 12 lakh | Up to Rs 6 lakh at once; rest via annuity or systematic payouts over at least six years |
| Normal exit, corpus up to Rs 8 lakh | Full amount can be withdrawn |
| Exit before normal exit eligibility | Up to 20% lump sum; at least 80% to annuity |
| Early exit, corpus Rs 5 lakh or less | Full amount can be withdrawn |
| Partial withdrawals before 60 | Up to four, each up to 25% of your own contributions, at least four years apart, for set purposes |
Normal exit for all-citizen subscribers is reported as 15 years in NPS or age 60, whichever is earlier, and you can stay invested up to age 85. The earlier five-year minimum before premature exit has been removed.
Tax on withdrawals: Under current tax law, up to 60% of the corpus paid on closure is exempt. Reports flag that the part above 60% (now that up to 80% is allowed) may be taxable. Annuity income is taxed as income when you receive it.
Questions to ask HR before opting in
- Is NPS optional, and can I change my contribution percentage later?
- Will opting in change my in-hand salary?
- Which pension fund and investment choice is set by default?
- How do I see my PRAN and statements?
Build income first, then plan
NPS only helps if you have a salary to contribute from. If you are still looking for that first role, asuraa.in lists fresher jobs from companies verified before posting, with apply links checked every morning. Once you join, our first salary plan helps you decide what to set up first.
Frequently asked questions
Can I claim NPS deduction in the new tax regime?
For FY 2026-27, only the employer's contribution to your Tier I account is deductible in the new regime, up to 14% of basic pay plus DA. Your own contribution and the extra Rs 50,000 deduction are available only in the old regime.
Is NPS compulsory for private-sector freshers?
No. For private-sector employees NPS is voluntary. Your employer may offer it under the corporate model, and you can also open an account yourself.
Can I withdraw NPS money before 60?
Tier I allows limited partial withdrawals for set purposes, and early exit with at least 80% going to an annuity unless the corpus is Rs 5 lakh or less. Tier II money can generally be withdrawn any time.
What happens to my NPS if I change jobs?
Your PRAN stays the same. You can shift it to the new employer's corporate NPS if they offer it, or continue contributing on your own under the all-citizen model.
Is NPS return guaranteed?
No. NPS returns depend on market performance of the investments you choose. This article is general information, not financial advice.
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