Rohit is 34. He earns ₹18 lakh a year. Every March he asks the same question: should the ₹1.5 lakh he puts away for retirement go into a PPF, or into NPS?
He is not asking a silly question. Both schemes are government-scheme cousins. Both give you tax breaks. Both hold your money for a long time. On paper they look like siblings.
On the money, they behave nothing alike. And in 2025-26 the gap between them got wider, because the pension regulator changed one rule and the tax department did not follow.
This article walks through both, with real numbers. It does not tell you which one to pick, because the honest answer depends on two questions only you can answer.
First, the rule change nobody explained
PFRDA — the pension regulator — amended its exit regulations in December 2025. The Amendment Regulations are dated 12 December 2025 and were published in the Gazette of India on 15 December 2025. (The comparative table I quote below comes from PFRDA’s press release of 19 December 2025, a separate document from the notification itself.) For the wider picture, see the wider retirement scheme landscape in India.
In plain terms, for the non-government sector — what most of us are in through the All Citizen Model or our employer’s scheme — the mandatory annuity portion at exit dropped.
Old rule: at least 40% of your corpus had to buy an annuity. You could take only 60% as lump sum. New rule: at least 20% annuity, so you can take up to 80% as lump sum.
From PFRDA’s own comparative table of old versus revised stipulations: “Up to 80% lumpsum; At least 20% annuity.”
So the pension regulator says you may take 80% of your NPS money as a one-time payment.
Now the part most articles get wrong
Can you take 80% of your NPS as tax-free lump sum? No. The pension regulator changed the rules in December 2025 and lets a non-government subscriber take up to 80% of the corpus as lump sum. The Income-tax Act was not changed to match: section 10(12A) exempts only the first 60%, and the balance is taxed at your slab rate. On a ₹1.66 crore corpus that is ₹33.2 lakh, and it costs about ₹6.6 lakh in tax at the 20% slab or ₹10 lakh at 30%.
Here is the trap, and it is a genuine gap between two separate laws.
Section 10(12A) of the Income-tax Act is the clause that makes NPS money tax-free. I pulled the text from the Income Tax Department’s section 10 page. Clause (12A) says:
“any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed sixty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme”
Sixty per cent. Not eighty.
I checked the surrounding clauses too. (12AA) and (12AB), covering the Unified Pension Scheme, were inserted by the Taxation Laws (Amendment) Act, 2025 with effect from 1 April 2025. (12BA), covering partial withdrawal for a minor, was inserted by the Finance Act 2025 with effect from 1 April 2026. None of them touch (12A). It still says sixty per cent. It has not been amended to match PFRDA’s 80%.
What this means in rupees
Take the balanced NPS corpus from the table below — ₹1.66 crore.
- PFRDA lets you take up to ₹1.33 crore as lump sum (80%)
- Section 10(12A) exempts the first ₹99.5 lakh (60%)
- The gap — ₹33.2 lakh — is taxable at your slab rate
That gap costs about ₹6.6 lakh at the 20% slab, or ₹10 lakh at 30%.
Now the honest part: that ₹33.2 lakh is exactly the 20% you must put into an annuity anyway. The PFRDA rule requires at least 20% to go to an annuity purchase. So the taxable slice is, in practice, the same money you were going to spend on an annuity.
This is a real inefficiency in the rules, not a bug in your planning. Whether it bites you depends on how the annuity is drawn down — pension income is generally taxed at your slab each year as you receive it, with no slab-free threshold. On a 25-year drawdown that can cost more than a one-time hit. Worth a conversation with a tax adviser before you commit.
The takeaway: PFRDA moved to 80%. The Income-tax Act did not move to 80%. Both are true at the same time, today.
The PPF rules, from the notified scheme
The PPF is governed by the Public Provident Fund Scheme, 2019, notified vide G.S.R. 915(E) dated 12 December 2019.
The 15-year term. Paragraph 11(1): “Any time after the expiry of fifteen years from the end of the year in which the account was opened, the account holder may apply in Form-3 to the accounts office for the closure of his account.”
Two ways to keep it going. Paragraph 11(2) lets you hold the account “without making any further deposits for any period” — and “the account holder may make one withdrawal, in each year, of any amount within the balance.” No cap on the amount. Paragraph 12(1) lets you instead extend with fresh deposits for “a further block period of five years.”
One catch, and it is permanent. Paragraph 11(3): “Once the account is continued without deposits for more than a year, the account holder shall not have the option again to continue the account with deposits.”
So if you let a matured account sit for a year without depositing, the door to depositing again closes for good. The other half is paragraph 12(6): if you have been depositing through one or more five-year blocks, you may “leave the account without deposits on completion of any block period” — the account keeps earning interest and you may make one withdrawal every year.
The withdrawal ceiling in extension mode. Paragraph 12(4) makes the partial-withdrawal facility of paragraph 10 available, “subject to the condition that the total withdrawal during the block period of five years shall not exceed sixty per cent. of the balance at credit at the commencement of the block period.” So extending with deposits caps you at 60% per five-year block; extending without deposits leaves you free to withdraw any amount, once a year.
The deposit ceiling. Paragraph 4(1): “A deposit which shall not be less than five hundred rupees and not more than one lakh fifty thousand rupees in multiple of fifty rupees may be made in an account in a year.”
One year, one lakh fifty thousand. That is the whole ceiling, which is why ₹1.5 lakh a year is what makes the comparison below fair.
Interest rate. 7.1% per annum for the current quarter (Q3 of FY 2026-27, October to December 2026), per the Department of Economic Affairs rate revision notified on 30 September 2026. It has held at 7.1% for a long stretch. But the government sets it, quarter by quarter, and notifies it in the Gazette. It is not a rate fixed for 25 years.
The real numbers: ₹1.5 lakh a year for 25 years
Rohit is putting away ₹1.5 lakh a year — the PPF ceiling, and therefore the highest amount that is genuinely like-for-like. 25 years, contributions at month end.
| Invested | PPF @ 7.1% | NPS Balanced @ 10% | NPS Aggressive @ 12% | |
|---|---|---|---|---|
| Final value | ₹37.5 L | ₹1.00 Cr | ₹1.66 Cr | ₹2.35 Cr |
| Gain over invested | — | ₹62 L | ₹1.28 Cr | ₹1.97 Cr |
A note on the PPF figure, because it is not the number a calculator will show you. Under the Scheme, interest becomes eligible each calendar month on the lowest balance between the close of the fifth day and the end of the month (para 7(1)), and it is credited to the account at the end of each year (para 7(2)). Crediting once a year is not compounding once a year — the monthly accrual sits on the running balance, and credited interest starts earning only from the next credit. Because para 7(1) measures the month from the close of the fifth day, depositing before the 5th gives ₹99.95 lakh and after gives ₹99.38 lakh — both round to ₹1.00 Cr, so if your own calculator lands a little either side, this is why.
Read the 10% and 12% columns carefully. Those are not predictions. They are what compounding at those rates produces if the funds deliver them. NPS schemes are market-linked. Actual returns will differ, and in some years will be negative. The Aggressive column is the one most likely to make you uncomfortable in a bad year, because its growth depends heavily on equity markets.
Now the after-tax comparison on the Balanced corpus of ₹1.66 Cr:
| Scenario | You keep, tax paid | Into annuity |
|---|---|---|
| PPF, entire balance | ₹1.00 Cr, exempt from tax | none |
| NPS — take only the tax-free 60% | ₹99.5 L | ₹66.3 L (40%) |
| NPS — take 80% at 20% slab | ₹1.26 Cr | ₹33.2 L (20%) |
| NPS — take 80% at 30% slab | ₹1.23 Cr | ₹33.2 L (20%) |
Look at the annuity column, because it is where the cautious exit quietly costs more than it appears.
Taking less lump sum does not mean less annuity — it means more. The 20% figure is the minimum annuity that applies when you take the full 80%. Take 60% instead and the residual grows to 40% to match. On this corpus that is ₹66.3 lakh locked into an annuity against ₹33.2 lakh if you take the full 80% — and pension income is taxed at your slab every year as you receive it.
So the cautious exit is the one that hands you the smallest cheque and commits the largest share to an annuity you will be taxed on annually.
PPF matches the cautious NPS exit, on the lump sum alone. ₹99.95 lakh against ₹99.51 lakh — a match at the rounding. But PPF’s number needs no annuity purchase and carries no drawdown tax, so the real gap between them is wider than the headline suggests.
Taking the full 80% gives you more cash, but you are not coming out ahead. You receive ₹33.2 lakh more in your hand than you would at 60%, and you pay ₹6.6 to ₹10 lakh in tax for it. Here is the part worth slowing down on: the ₹33.2 lakh of cash you release and the ₹33.2 lakh of annuity you give up are the same money. You also give up 20 points of annuity — 40% of the corpus becomes 20% — so this is a swap of deferred income for cash now, not money on top.
Which means the arithmetic settles almost nothing. Before tax, you are neither gaining nor losing; you are choosing between two forms of the same ₹33.2 lakh. What decides it is what that annuity would pay you over your retirement — a rate no table in this article can supply, and one you can only find out by asking for quotes on the day you exit, because it depends on the insurer, your age and the option you pick. No regulator publishes a reference rate for it, which is why this is a valuation judgement rather than a calculation.
The framing most comparisons miss: on NPS, the tax-free limit is a cap, not a target. The regulator permits 80%; the taxman exempts 60%. Stopping at 60% to stay clean looks prudent, but it commits twice as much of your corpus to an annuity in exchange for a smaller lump sum — and no arithmetic in this article rewards that choice. That choice only arises above ₹8 lakh. Below that, the rules let you take the whole corpus as lump sum and the 60/80 question never arises.
The decision matrix
| Your priority | Lean toward | Why |
|---|---|---|
| You want a known final number | PPF | Rate notified quarterly, exempt at maturity |
| You cannot stomach a negative year | PPF | No market risk |
| You have a 25+ year horizon and can ride volatility | NPS | The compounding gap is large |
| You need the money in one go, not as a pension | PPF | Whole balance available as lump sum, exempt — nothing to draw down and tax it every year |
| You want a pension income stream later | NPS | Annuity is the point |
| You want to avoid annuity complexity entirely | PPF | No purchase, no drawdown tax |
The one thing almost everyone gets wrong: you do not have to choose. Many people run both — ₹1.5 lakh in PPF and the rest in NPS. That gives you a known tax-exempt amount you can take in one go, plus a larger market-linked corpus — with the understanding that the NPS half is partly an annuity you will be taxed on as you draw it, and how much of it depends on how you exit.
Risks on both sides
PPF risks:
- The rate is set quarterly by the government and can come down. Do not build a plan that assumes 7.1% forever.
- Inflation runs at 4-6%. A rate near 7% is a real return of 1-3%. Over 25 years that gap is large.
- Premature closure is allowed on narrow grounds — life-threatening illness, higher education, or change of residency status (para 13(1)) — but on such closure interest is allowed at a rate one per cent below the rate at which it has been credited in the account from time to time. The penalty scales with the rate you were actually getting.
- If you let a matured account run a year without deposits, para 11(3) ends your option to deposit again, and with it the 80C deduction on those future deposits.
- Interest is credited once a year at the end of each year (para 7(2)), so your statement will show one credit a year, not a monthly accrual. That is normal, and it is why the ₹1.00 Cr figure sits below the monthly-compounding number.
NPS risks:
- No lock-in. The 2025 amendment removed it for the All Citizen Model. Fifteen years or age 60, whichever is earlier, is the vesting period — the point at which you qualify for normal exit at up to 80% lump sum and 20% annuity. Before that, premature exit is available at any time, but the price is heavy: up to 20% lump sum and at least 80% annuity. You are not trapped for 15 years; you are choosing a smaller payout if you leave early.
- Market risk. A year or two of negative returns is normal, not exceptional. The ₹2.35 Cr Aggressive figure depends on returns nobody has promised.
- The 60% vs 80% gap. You may legally take 80% and be taxed on 20% of it. Current law, and it can change in either direction.
- Annuitisation is not neutral. Whatever you do not take as lump sum is annuitised, so taking 60% means locking 40% into a pension taxed annually. The lower your lump sum, the larger that commitment.
- Annuity costs. The mandatory portion goes to an insurer, and the price is not fixed by anyone. PFRDA’s own guidance is that “subscribers are advised to compare annuity rates and terms offered by different ASPs before making a decision” — so get an actual quote, and get more than one.
- Pension income is taxed at your slab as received, every year. Over a long retirement this compounds into a real tax bill, and it is the part most people forget when comparing a lump sum against a pension.
Both: the government can change any of these rules. Every projection here assumes the current rules hold for 25 years, and nobody can promise you that.
The question that decides it, before either scheme
Is a PPF contribution tax-saving under the new regime? No. The section 80C deduction is not available, so a ₹1.5 lakh PPF contribution produces no deduction at all at filing time. What remains exempt is the interest and the maturity amount — and that exemption does not vary with your slab. Your own NPS contributions do not survive the new regime either.
There is one fact that should be settled before anyone puts a rupee into either scheme, and it has nothing to do with returns.
Which tax regime are you in?
The general rule first: the new regime is the default unless you have opted out, which most people have not. It applies at every income level. There is no income threshold at which the old regime becomes the default by itself — a reader earning ₹9 lakh is in the new regime on exactly the same terms as one earning ₹90 lakh, unless they have taken the step to opt out.
What remains exempt is the interest and the maturity amount — and that exemption does not vary with your slab. The contribution itself buys you nothing at filing time.
Under the old regime, the same ₹1.5 lakh is worth up to ₹1.5 lakh of deduction, and the separate ₹50,000 NPS allowance on top.
Rohit, at ₹18 lakh, is in that position — not as a special case, but as an example of the rule above.
The one deduction that does survive the new regime is your employer’s NPS contribution, up to 14% of salary — a limit raised from 10% with effect from 1 April 2025. That is a footnote to the point above, not a loophole in it, and your own NPS contributions do not survive the new regime at all.
This inverts the comparison for a large slice of readers, and it is not a detail. If you are in the new regime and nobody told you, the entire tax case for a PPF quietly disappears, and you are comparing two schemes on market returns alone.
Before you compare the two schemes, find out which regime you are actually in. That single answer changes what every number in this article is worth to you.
If your employer is deducting tax under the new regime and you have not opted out, a PPF contribution is worth zero as a deduction today. Work that out first — it takes five minutes and it moves the answer more than anything else in this article.
Then, if you are weighing the NPS exit, run this on your own numbers rather than mine. Take your projected corpus, multiply by 80%, subtract the 60% that s.10(12A) exempts, and tax the difference at your slab. That difference is ₹33.2 lakh on a ₹1.66 Cr corpus — ₹6.6 lakh of tax at the 20% slab, ₹10 lakh at 30%, so the cash you keep after tax is about ₹26.5 lakh at the 20% slab, or ₹23.2 lakh at 30%. You also give up 20 points of annuity — 40% of the corpus becomes 20% — so this is a swap of deferred income for cash now, not money on top. Then take your quotes to a tax adviser and ask what the pension income will cost you after tax over your retirement, at your slab. That number they can give you; the rate itself they cannot. And there is no equivalent exercise for the PPF: its return is notified quarterly and its exemption does not vary with your slab, so there is nothing in it for you to compute.
The one thing worth knowing either way: the regulator lets you take 80%. The taxman exempts 60%. Almost nobody explains that, and it is the whole reason these two schemes do not behave alike.
Sources
- PFRDA (Exits and Withdrawals under the National Pension System) (Amendment) Regulations, 2025, dated 12 December 2025, published in the Gazette of India, Extraordinary, Part III Section 4, on 15 December 2025, No. 808, CG-DL-E-16122025-268548. Schedule I, Table 2 confirms “Up to 80% / At least 20%” for corpus above ₹12 lakh, with the residual annuity rising as the lump sum falls.
- PFRDA press release, Key amendments in PFRDA (Exits and Withdrawals under the NPS) Regulations, 2015, 19 December 2025 — the comparative table of earlier versus revised stipulations, including the corpus thresholds of ₹8 lakh and ₹12 lakh and the government-sector position unchanged at 60/40.
- Income Tax Department, Government of India, Section 10, Income-tax Act 1961, clause (12A) — quoted verbatim above. Checked alongside (12AA) and (12AB) as inserted by the Taxation Laws (Amendment) Act, 2025 w.e.f. 1 April 2025, and (12BA) as inserted by the Finance Act, 2025 w.e.f. 1 April 2026.
- Income Tax Department, Section 80CCD — the Finance (No. 2) Act, 2024 proviso substituting “fourteen per cent” for “ten per cent” in sub-section (2), w.e.f. 1 April 2025, where total income is chargeable under section 115BAC(1A). Also FAQs on New Tax vs Old Tax Regime, for the default-regime position and the absence of an income threshold.
- PFRDA, Annuity Service Providers (ASPs) — the regulator’s guidance that annuity premium rates and pension amounts vary across providers and that subscribers should compare rates and terms across ASPs before deciding, quoted in the risks section. The same page confirms there is no single published annuity rate.
- Public Provident Fund Scheme, 2019, notified vide G.S.R. 915(E) dated 12 December 2019, amended by G.S.R. 290(E) dated 5 May 2020. Paragraphs 4(1) (deposit ceiling), 7(1) and 7(2) (interest eligibility and crediting), 11(1) (15-year term), 11(2) (continuation without deposits), 11(3) (the one-way consequence), 12(1), 12(4), 12(6), 13(1) (premature closure).
- Department of Economic Affairs, Ministry of Finance, Revision of interest rates for Small Savings Schemes for Q3 2026-27, notified 30 September 2026.
This article is for education only. It is not investment advice, and it does not recommend any product. Figures are arithmetic projections at assumed rates of return, not forecasts — market-linked returns will vary. Consult a SEBI-registered investment adviser before investing.
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