Old Pension Scheme Not Returning? What NPS Tier 1 Really Pays at Retirement

If you are a salaried employee who joined government service after 2004, or a private-sector professional who has been told that the Old Pension Scheme is not coming back, you are not alone in feeling uneasy. The Centre has ruled out restoring the Old Pension Scheme (OPS) for those in the New Pension System, which leaves most of us asking a blunt question: what will my monthly pension actually look like when I retire? Many people assume the NPS will somehow replicate half of their last-drawn salary, and that assumption is where the trouble starts.

Here is a number worth sitting with. A person who starts an NPS Tier 1 account at 30 and contributes ₹5,000 a month can end up with a corpus of roughly ₹1.1 crore at 60 if the portfolio compounds at a healthy rate over three decades. Yet only 40% of that corpus is mandatorily used to buy an annuity, and the monthly pension that annuity produces can be surprisingly modest, often in the range of ₹40,000 to ₹50,000 a month depending on your age, the annuity provider and the payout option you pick. That is real money, but it is not the same as a defined-benefit pension tied to your final salary.

This article explains, step by step, how an NPS retirement corpus is built during your working years, how the annuity portion is bought and what it pays, and how the lump sum can be drawn down. By the end you should be able to estimate your own likely monthly pension, spot the common mistakes that shrink it, and decide where an NPS Tier 1 account fits alongside your other savings. You can also check your figures with our NPS Calculator as you read.

Key Takeaways

• Under NPS Tier 1, at maturity (age 60) you can withdraw up to 60% of the corpus as a lump sum, and the remaining 40% must go into an annuity. The 40% portion sets your monthly pension.
• Your monthly pension depends on three things: the final corpus, the annuity rate prevailing at retirement, and the payout option you choose (life only, with return of purchase price, or joint life).
• Contributions of up to ₹50,000 a year get an additional deduction under Section 80CCD(1B) over and above the ₹1.5 lakh limit under Section 80C, in the old regime. Employer contribution up to 14% of basic plus DA is deductible under Section 80CCD(2) in either regime.
• Fund choice and time in the market matter more than almost anything else. A 2–3 percentage point difference in annual returns can change your corpus by tens of lakhs over 30 years.
• Always model the annuity portion conservatively. Assume a lower annuity rate and lower pension than the headline figure, and check against your actual living costs after inflation.
• Consider NPS alongside a separate corpus (mutual funds, PPF, real estate) rather than treating it as your only retirement plan.

What is an NPS Tier 1 account and how does the corpus actually grow?

NPS Tier 1 is the mandatory retirement account in the National Pension System, run by the Pension Fund Regulatory and Development Authority (PFRDA). You open it through a point of presence such as a bank, a post office or an online aggregator, and your contributions are invested across four asset classes: equity (E), corporate bonds (C), government securities (G) and alternative assets (A). You can choose an active allocation, where you set the percentages yourself within regulatory caps, or the Auto Choice option, where the allocation shifts automatically with your age.

The corpus grows through two channels. Your contributions go in, and the returns on those contributions compound. Unlike a fixed deposit, there is no guaranteed rate. Returns depend on how each asset class performs in a given year, which is why the equity share matters so much over long horizons.

Here is a worked example. Suppose Rahul, aged 30, earns ₹12 LPA and puts ₹5,000 a month into NPS Tier 1, invested 75% in equity and 25% in debt. Assume a blended return of 10% a year, compounded monthly, for 30 years until he turns 60.

1. Total contribution over 30 years: ₹5,000 × 12 × 30 = ₹18,00,000.
2. Monthly rate: 10% ÷ 12 = 0.8333%, and the number of months is 360.
3. Future value of a monthly SIP: FV = P × [((1 + r)^n − 1) ÷ r] × (1 + r), where P = ₹5,000, r = 0.008333 and n = 360.
4. (1.008333)^360 is approximately 19.60, so ((19.60 − 1) ÷ 0.008333) × 1.008333 ≈ 2,253.
5. FV ≈ 5,000 × 2,253 ≈ ₹1,12,65,000, or roughly ₹1.13 crore.

So Rahul's corpus at 60 is about ₹1.13 crore, of which only about ₹18 lakh is his own money. The rest is compounding. That is the power of starting early, and it is also why delaying NPS by ten years can cut the final figure almost in half at the same contribution level.

If you want to test different contribution amounts or return assumptions, the SIP Calculator uses the same compounding logic and is a quick way to sanity-check your projections.

How is an NPS retirement corpus divided at age 60?

When you reach retirement (the default exit age is 60), the rules for NPS Tier 1 require you to split the accumulated corpus into two parts. You can take up to 60% as a lump sum, which is tax-free up to the limits applicable on withdrawal. The remaining minimum of 40% must be used to purchase an annuity from an IRDAI-regulated life insurance company, which pays you a monthly, quarterly, half-yearly or annual pension for life.

Applying this to Rahul's ₹1.13 crore corpus:

• Lump sum (60%): ₹67,80,000, which he can withdraw.
• Annuity purchase (40%): ₹45,20,000, which must be used to buy an annuity.

Notice that the pension is funded from only ₹45 lakh, not ₹1.13 crore. That is the single most important number to understand before you start planning around NPS.

There is an important exception: if your total corpus at exit is ₹5 lakh or less, you can withdraw it entirely, and in some cases the rules allow a different split. Check the current PFRDA regulations at the time of exit, since these thresholds are reviewed periodically.

How much monthly pension will ₹45 lakh actually buy?

This is where most people get a shock. The monthly pension is determined by the annuity rate, which is the percentage of your purchase price that the insurer pays out annually. Annuity rates in India for a 60-year-old have generally sat in the range of roughly 5% to 7.5% a year, depending on the annuity product, the payout frequency and the insurer. Rates change with bond yields, so the rate on the day you retire could be meaningfully different from today's.

Let us assume an annuity rate of 6.5% a year on a purchase price of ₹45,20,000:

1. Annual pension: ₹45,20,000 × 6.5% = ₹2,93,800.
2. Monthly pension: ₹2,93,800 ÷ 12 ≈ ₹24,483.

That is roughly ₹24,500 a month, before tax, from life-only annuity. Now compare that with what Rahul currently earns. On ₹12 LPA, his monthly gross is ₹1 lakh. An annuity of ₹24,500 is about 24% of that figure, and considerably less than what he would need to maintain his lifestyle, let alone keep pace with inflation.

The choice of payout option also matters:

Annuity option	How it pays	Typical annuity rate (indicative)	Monthly pension on ₹45.2 lakh	Best suited for
Life annuity, no return of purchase price	Pays for life; nothing passes to nominee on death	Highest, around 6.5%	About ₹24,500	Single individuals with no dependants
Life with return of purchase price	Pays for life; purchase price returned to nominee on death	Lower, around 5.8%	About ₹21,900	People with dependants who want a legacy
Joint life, last survivor	Pays until both spouses have passed	Lower again, around 5.5%	About ₹20,700	Couples prioritising spousal security
Increasing annuity	Starts lower, rises by a fixed percentage each year	Starts around 5%, rising	About ₹18,800 initially	Those who want partial inflation protection

Annuity rates above are illustrative only. Check the current rates offered by annuity providers at the time you retire.

Pro tip: Many people choose the life-only option because it pays the most, but if you have a spouse or children who depend on your income, the joint-life or return-of-purchase option may be far more sensible. A slightly smaller pension that protects your family is usually a better trade than the highest possible number on paper.

What tax applies to the lump sum and the annuity?

Taxation is where NPS gets confusing, so let us separate the three stages clearly.

Contributions. Your own contribution to NPS Tier 1 qualifies for a deduction under Section 80CCD(1), which sits inside the overall ₹1.5 lakh limit of Section 80C in the old tax regime. An additional ₹50,000 is deductible under Section 80CCD(1B), over and above the ₹1.5 lakh limit. Employer contributions up to 14% of basic plus DA are deductible under Section 80CCD(2), and this deduction is available even under the new tax regime. This is one of the few places where the new regime still gives meaningful relief, so it is worth keeping in mind when choosing between regimes.

Returns during accumulation. The gains inside the NPS fund are not taxed year by year, which is an advantage over many debt instruments.

At exit. The lump sum withdrawal at retirement is generally tax-free, while the annuity income is taxable as income from other sources in the year you receive it. This is worth planning for, because a retired person with a ₹24,500 monthly annuity plus interest income from fixed deposits may still have taxable income.

Let us run a quick check. Suppose Rahul's annuity is ₹2,93,800 a year and he has ₹3 lakh of FD interest. His total taxable income is about ₹5.94 lakh. Under the new regime for FY 2025-26, income up to ₹12 lakh is effectively nil-tax after the rebate, so the annuity itself does not create a tax problem at this level. But tax outcomes depend on your full income picture, so do run the numbers with the Income Tax Calculator before you decide.

How do I build my own retirement corpus estimate step by step?

You do not need a financial planner to make a reasonable first estimate. Follow these steps and write the numbers down as you go.

1. Set your target retirement age and expected monthly expense. Use today's cost of living, then inflate it. At 6% inflation, ₹60,000 a month today becomes roughly ₹1.07 lakh a month in 10 years and about ₹2.15 lakh a month in 20 years. You can test this with our Inflation Calculator.
2. Decide your monthly NPS contribution. Be realistic. A contribution you keep for 30 years beats an ambitious one you abandon in year 4.
3. Choose an expected return. A blended 9–10% for an equity-heavy portfolio is a common planning assumption, but use a lower figure, such as 8%, if you want a conservative test.
4. Project the corpus. Use the compounding formula shown earlier, or an online NPS Calculator.
5. Split the corpus. Multiply the final figure by 0.6 for the lump sum and 0.4 for the annuity purchase.
6. Estimate the annuity. Multiply the annuity purchase by a conservative annuity rate, such as 6%, and divide by 12 for the monthly pension.
7. Compare with your target expense. If the gap is large, you need other sources: a separate SIP, PPF, rental income, or a larger contribution.

Common mistake: Many people equate the 60% lump sum with spare cash to spend freely. In reality, that lump sum is also your emergency fund and healthcare reserve for the next 20 years. Plan its use carefully, perhaps keeping a portion in fixed deposits or a debt fund and drawing from it systematically.

Should NPS be my only retirement savings?

For most salaried Indians, the honest answer is no. NPS is a useful building block, but relying on it alone leaves you with an annuity-heavy outcome that is often inflation-vulnerable. A sensible structure has several layers:

• NPS Tier 1 for disciplined, tax-advantaged, long-term equity and debt exposure.
• PPF for a government-backed, tax-free debt component with a 15-year lock-in and a sovereign rate that is reset quarterly.
• Equity mutual funds through SIPs for flexible, liquid growth. Watch costs closely here, as explained in our piece on how a 0.5% extra fee can cost lakhs.
• Fixed deposits or debt funds for near-term safety. Keep in mind that after inflation, the real returns can be thin; see what inflation does to FD real returns.

For a quick feel of how a PPF component compares, the PPF Calculator shows the maturity value of a steady ₹1.5 lakh a year contribution.

What should I know about withdrawals before and after 60?

Withdrawal rules differ depending on whether you exit early, partially withdraw during the accumulation phase, or wait until 60. NPS Tier 1 allows partial withdrawals for specific purposes such as higher education, marriage, purchase of a first home or certain medical needs, subject to conditions on how long you have been subscribed and the percentage you can take. Premature exit before 60 generally requires a larger annuity purchase. If you are considering stopping contributions or exiting early, read the detailed rules in our guide to NPS withdrawal rules for 2026, covering Tier 1 and Tier 2 before you act, because the timing and type of withdrawal change the tax and annuity outcome significantly.

Also remember that if you change jobs, your NPS account moves with you through your Permanent Retirement Account Number (PRAN). Keep your PRAN, nominee details and contact information current. Many people discover at 60 that a nominee was never updated, which causes avoidable delays.

Could a future pay commission change my pension picture?

Pension debates are rarely settled quickly, and the outcome of future pay reviews can affect both current and retired employees. If you are a government employee, the implications of a fresh pay commission and any renewed discussion of the old scheme are worth tracking, and our analysis of what a return to the Old Pension Scheme could mean for your pay sets out the scenarios. Regardless of the outcome, do not put all your retirement hopes on a policy change you cannot control. Build a plan that works under the current rules and treats any future improvement as a bonus.

Practical checklist before you rely on NPS

• Confirm your PRAN and log in to check your current corpus and asset allocation.
• Review your fund manager's performance and charges, not just the headline return.
• Update nominee details and keep a copy of your PRAN in a safe place.
• Decide whether you want active or Auto Choice allocation, and revisit it once a year.
• Claim the 80CCD(1B) and 80CCD(2) deductions correctly in your tax filing.
• Run a retirement corpus projection every year and adjust contributions as your income grows.
• Plan for a conservative annuity rate, and for the impact of inflation on a fixed monthly pension.

Frequently asked questions

How much monthly pension can I get from NPS Tier 1?

It depends on your final corpus, the annuity rate at retirement and the payout option. Only 40% of the corpus must be used for the annuity, so a ₹1 crore corpus might produce roughly ₹24,000 to ₹26,000 a month on a life-only annuity at around 6.5%, but the figure will vary with market conditions and your choice of product.

Can I withdraw my entire NPS corpus at 60?

Not if your corpus is above the small-corpus threshold. You can take up to 60% as a lump sum, and the remaining 40% must be used to buy an annuity. The exact thresholds are set by PFRDA and can change, so confirm the current rules before exit.

Is the NPS lump sum taxable?

The lump sum withdrawal at retirement is generally tax-free, while the annuity income you receive each year is taxable as income from other sources. Your overall tax depends on your total income in that year, so check the position closely.

How is NPS different from the Old Pension Scheme?

The Old Pension Scheme was a defined-benefit scheme, where pension was linked to your last-drawn salary and dearness allowance. NPS is a defined-contribution scheme, where your pension depends on how much was contributed, how it was invested and what annuity rate applies at retirement. There is no guaranteed salary-linked pension under NPS.

Which NPS allocation is best for a 30-year-old?

A younger investor with a long horizon can usually tolerate a higher equity share. The Auto Choice option reduces equity gradually as you approach retirement. Whichever you choose, review it annually, and align it with your risk tolerance rather than chasing last year's best-performing fund.

What happens to my NPS corpus if I die before 60?

Your nominee receives the accumulated corpus according to the rules in force at the time. Keeping nominee details up to date is essential, since they determine who receives the money and how quickly.

Can I use NPS to fund my child's education or a home purchase?

Partial withdrawals are permitted for specified purposes, including higher education, marriage and first home purchase, within the conditions and percentage limits set by PFRDA. Do not treat these as costless; every rupee withdrawn early loses years of compounding.

Conclusion

The end of the conversation about restoring the Old Pension Scheme does not have to be a crisis. What it does demand is a clearer understanding of how an NPS retirement corpus is built, split and converted into income. With disciplined contributions, a sensible asset allocation and a realistic view of annuity rates, NPS Tier 1 can form a strong core of your retirement plan. Treat it as one pillar among several, model your numbers conservatively, and revisit the plan every year. You can start today by running your own scenario through the NPS retirement corpus calculator India and checking the monthly pension it implies against the lifestyle you want at 60.

Image credit: President Cyril Ramaphosa addresses Team SA ahead of Investment Conference — GovernmentZA, via flickr (BY-ND 2.0), sourced from Openverse.