The Ultimate Guide to 5 Lesser-Known Aspects of NPS (2025)

The 5 Hidden Features That Make Your NPS a Powerhouse

The lesser-known aspects of NPS are often its most powerful features. For most people, the National Pension System, or NPS, is that “boring” but necessary retirement tool. You know the basics: you put money in, it gets invested, it’s locked until you turn 60, and then you get a lump sum and a pension. It feels rigid, inflexible, and a bit old-fashioned. You contribute because of the tax deduction, but you don’t think of it as a dynamic part of your finances.

But here’s the truth: that’s not the full story. Not anymore. The NPS of today has evolved. It has been quietly updated with a suite of flexible options that most subscribers don’t even know exist. These hidden features can completely change how you plan your finances, both before and *after* retirement. These are not small tweaks; they are game-changing options that give you control over your money.

We’re not just talking about the tax benefits. We’re talking about options that let you treat your NPS like a mutual fund, get a monthly salary from your own corpus, and even delay your pension. It’s time to look under the hood. This guide will reveal five of the most powerful lesser-known aspects of NPS that can transform it from a simple locked box into one of the most dynamic financial tools you have.

1. Beyond the Lump Sum: The “Salary” You Can Pay Yourself

This is arguably the most powerful post-retirement feature. Let’s start with the old rule: when you turn 60, you can withdraw 60% of your total corpus as a tax-free lump sum. The other 40% *must* be used to buy an annuity (your monthly pension). For years, this was the only choice.

But what if you don’t need a massive, multi-lakh lump sum on day one? You might be tempted to spend it, or it will just sit in a 5% savings account, getting eaten by inflation. The “new look” National Pension System gives you a brilliant alternative: a Systematic Withdrawal Plan, or NPS SWP.

Instead of taking that 60% lump sum, you can leave it right there in your NPS account. You can then instruct the fund manager to pay you a fixed amount every month, every quarter, or every year. This is your money, paid back to you on your schedule. You can set this up to last all the way until you turn 75. This effectively becomes a “salary” you pay yourself from your own savings.

Why is this so smart? The money you *don’t* withdraw in that first month stays invested in your NPS fund. It continues to grow, ride the market, and earn returns. This is a far better option for cash flow and wealth generation than letting a huge lump sum sit idle. The one catch: unlike the tax-free lump sum, the withdrawals you make via the NPS SWP are taxed as income according to your slab.

2. “I Don’t Want a Pension Yet”: The Annuity Deferment

Let’s talk about that mandatory 40% for your annuity. At age 60, you are forced to take that chunk of money and give it to an insurance company in exchange for a lifelong pension. But what if you don’t want to? What if you’re still working and don’t need the extra income? Or, more importantly, what if interest rates are at an all-time low? Annuity rates are directly linked to market interest rates. If you buy an annuity when rates are low, you are locking in a low pension for the rest of your life. It’s a terrible deal.

This is where another one of the lesser-known aspects of NPS comes in: Annuity Deferment. You are no longer forced to buy the annuity immediately at age 60. You can now choose to *defer* this decision for up to three years, until you turn 63. During this time, your entire 40% corpus stays invested in your NPS account, continuing to grow. This gives you two massive advantages: you can wait in the hopes that interest rates will rise, and your corpus will be even bigger when you finally do buy the annuity, resulting in a larger monthly pension.

3. Your Pension, Your Way: The Annuity “Menu”

This is a common misconception. Most subscribers think “annuity” is just one product. You give them your money, and they give you a pension. But it’s not a one-size-fits-all product. When you do decide to buy your annuity (with that 40% corpus), you get to choose from a whole menu of options. The choice you make will have a huge impact on your family’s future.

The main options include:

• Annuity for Life: You get a fixed pension for your life. The moment you pass away, the payments stop, and the insurance company keeps the 40% corpus.
• Annuity for Life with Return of Purchase Price: You get a slightly lower pension, but when you pass away, the insurance company returns the entire 40% corpus to your nominee (your spouse or children).
• Joint-Life Annuity: You get a pension for life. When you pass away, your spouse continues to receive the same (or a portion of the) pension for their life.
• Joint-Life Annuity with Return of Purchase Price: This is the full package. You get a pension. Your spouse gets a pension after you. And after you both pass away, your nominee gets the original 40% corpus back.

Understanding these options is critical. A single person might choose the first option for a higher pension, while a married person would be wise to choose a joint-life option to protect their spouse. This kind of long-term financial planning is crucial, whether it’s for your pension or just tracking major financial shifts like the 8th Pay Commission salary hike.

4. The “Secret” Savings Account: The NPS Tier II Account

This is perhaps the most overlooked feature of the entire National Pension System. When you sign up for NPS, you are opening a Tier I account. This is the main, mandatory retirement account with all the tax benefits and the strict lock-in rules. But once you have a Tier I account, you become eligible to open a secondary account: the NPS Tier II account.

The NPS Tier II account is, simply put, a liquid mutual fund in disguise. It is a completely voluntary investment account. And here is its killer feature: it has *no lock-in period*. You can deposit money today and withdraw it tomorrow. It’s 100% liquid. You can use it for any goal you want—a vacation, a down payment, or just an emergency fund. It is managed by the same professional NPS fund managers at the same ultra-low cost, but it gives you total flexibility.

One crucial clarification: For most people (private-sector employees), there is no 80C tax benefit on contributions to a Tier II account, and the withdrawals are taxed based on capital gains. It is *only* for Central Government employees that a Tier II contribution can get an 80C deduction, and that comes with a 3-year lock-in. For everyone else, just think of it as a low-cost, high-flexibility investment account. You can learn more about all the scheme options on the official PFRDA website.

5. The “Break Glass” Feature: NPS Partial Withdrawal Rules

What if you have a real emergency? Is your Tier I money completely, 100% locked away until you’re 60? Not quite. This is one of the most important lesser-known aspects of NPS: the partial withdrawal rules.

The system provides a safety valve, but it has very strict rules. This is not a loan; you do not have to pay it back. But it’s only for true emergencies.

• You must be an NPS member for at least 3 years.
• You can only withdraw up to 25% of *your own contributions*. You cannot touch your employer’s contribution or the gains you have made.
• You can only do this for specific, documented reasons: a child’s higher education, a child’s marriage, the purchase or construction of your first house, or treatment for a critical illness.
• You can only use this feature a maximum of three times during the entire life of your account.

This feature is not meant for casual use. But it should give you peace of mind, knowing that if a true life-altering emergency happens, your retirement fund can serve as a final safety net. It’s a formal process, and you will have to provide documentation, just as you would for any official financial update, like a PAN card update.

Conclusion: Your NPS is Smarter Than You Think

The National Pension System is no longer the rigid, “locked box” it once was. It has evolved into a sophisticated financial tool that gives you incredible flexibility, but only if you know the rules. With features like the NPS SWP to create your own salary, annuity deferment to time your pension, the liquid NPS Tier II account, and the safety net of partial withdrawals, it’s one of the most powerful products in your portfolio.

Don’t just contribute and forget. Log in to your NPS account. Read your statements. Understand these features. Your 60-year-old self will thank you for it.

Frequently Asked Questions (FAQs)

Q: What is the new NPS SWP rule?
A: You can withdraw your 60% lump sum in installments (monthly, quarterly, etc.) from age 60 to 75.

Q: Can I take all my money out of NPS at 60?
A: No, you can only take a 60% lump sum; 40% must be used to buy an annuity (pension).

Q: What is an NPS Tier II account?
A: It is a voluntary investment account with no lock-in period, but it’s only available if you have a Tier I account.

Q: Is the NPS Tier II account tax-free?
A: No, contributions are generally not tax-deductible (except for some government employees) and withdrawals are taxed.

Q: How many times can I partially withdraw from NPS?
A: You can partially withdraw up to three times for specific reasons, like illness or a child’s education.