NPS Active Choice: Why Equity Cap Drops From 75% After Age 50 To Limit Volatility

When a National Pension System (NPS) subscriber picks Active Choice, the Pension Fund Regulatory and Development Authority (PFRDA) lets them hold up to 75% of their Tier I corpus in equity, but only until the year they turn 50. From age 51 the equity ceiling falls by 2.5 percentage points every year, landing at 50% by age 60. This is not a penalty; it is a deliberate de-risking glide path designed to protect a corpus that is roughly a decade away from being drawn down. The closer you are to your first pension cheque, the less time you have to recover from a 20% equity drawdown, so PFRDA caps the damage a bad market year can do to a near-retiree.

This guide explains how the Active Choice glide path works against the Auto Choice life-cycle funds, how each rupee is taxed when you exit at 60, and walks through a worked example of a Rs 1 crore corpus split into lump sum and annuity. Use our NPS calculator alongside this article to model your own age and contribution.

The Scheme Explained

NPS Tier I is a defined-contribution pension account regulated under the PFRDA Act, 2013. In Active Choice the subscriber actively allocates contributions across four asset classes: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A). The A class is capped at 5% of the corpus at all ages, while E carries the age-linked ceiling that is the subject of this article. You can change your Pension Fund Manager once per financial year and rebalance your asset mix, giving you direct control that Auto Choice does not.

The equity ceiling is fixed at 75% up to age 50. From the financial year in which you turn 51, the maximum permitted equity allocation tapers by 2.5 percentage points annually until it reaches 50% at age 60, a reduction of 25 percentage points spread across ten years. The table below sets out the Active Choice equity cap year by year, per PFRDA's allocation rules.

The rationale is sequence-of-returns risk. A 40-year-old with 75% equity can absorb a sharp market fall because contributions continue and the corpus has 20 years to recover. A 58-year-old with the same 75% exposure could see a fifth of their retirement wealth evaporate two years before they need it, with no recovery runway. By forcing equity down to 55% at 58 and 50% at 60, PFRDA reduces the volatility of the corpus precisely when capital preservation matters more than growth. You can read the formal asset-allocation framework on the PFRDA website.

Active Choice vs Auto Choice Glide Paths

Subscribers who do not want to manage allocation themselves can opt for Auto Choice, where the equity share is set mechanically by age through one of three life-cycle funds. Each fund holds its starting equity level until age 35, then tapers down to a fixed floor by age 55. The three variants differ only in how much equity they start with and where they end, as the table shows.

The contrast with Active Choice is sharp at retirement age. An Active Choice subscriber can still hold 50% equity at 60, while an LC75 Auto Choice subscriber is down to 15% equity by 55 and an LC25 subscriber holds just 5%. So Active Choice is the more aggressive route for someone who is comfortable carrying equity risk into their 60s and believes the extra growth outweighs the swings. Auto Choice de-risks faster and earlier, which suits a subscriber who would rather not watch markets. Both routes let you change your Pension Fund Manager once per financial year, and you can switch between Active and Auto Choice during the accumulation phase.

A practical point that catches subscribers out: switching from Active to Auto Choice resets your allocation to that life-cycle fund's age-appropriate mix immediately, which can mean a forced equity cut. Model both paths in our NPS calculator before you commit, because the difference in terminal corpus between holding 50% equity to 60 versus 15% from 55 can run into several lakh over a decade.

Tax on Withdrawal

NPS withdrawal taxation depends on what you do with the corpus at age 60, the normal superannuation exit age. At exit you may withdraw up to 60% of the accumulated corpus as a lump sum, which is fully exempt from income tax under Section 10(12A) of the Income-tax Act, 1961. The remaining minimum 40% must be used to buy an annuity from a PFRDA-empanelled annuity service provider. The annuity purchase itself is not taxed, but the monthly pension it pays is taxable as income under your applicable slab in the year of receipt.

Two tax design features deserve attention. First, partial withdrawals during the accumulation phase, permitted up to three times for specified needs such as a child's education or a medical emergency, are capped at 25% of the subscriber's own contributions and are exempt under Section 10(12B). Second, the popular extra deduction of Rs 50,000 for self-contributions under Section 80CCD(1B) is available only under the old tax regime; it cannot be claimed under the new tax regime. The employer-contribution deduction under Section 80CCD(2) is, by contrast, available in both regimes, up to 14% of basic salary plus dearness allowance.

For subscribers comparing NPS pension income against drawing down an equity fund, remember the contrast in capital-gains treatment. Long-term capital gains on listed equity are taxed at 12.5% beyond an annual exemption of Rs 1.25 lakh, per the Budget 2024 rules confirmed on the income tax portal. NPS annuity income enjoys no such exemption; it is added to total income and taxed at your slab. Under the new-regime slabs for FY 2025-26, income up to Rs 4 lakh is nil, the 30% rate begins only above Rs 24 lakh, and the Section 87A rebate now extends to a maximum of Rs 60,000 for total income up to Rs 12 lakh, meaning a retiree whose only taxable income is a modest NPS pension may pay no tax at all.

Worked Drawdown

Consider Anjali, an Active Choice subscriber who turns 50 in June 2026 with a Tier I corpus of Rs 50 lakh, contributing Rs 1.5 lakh a year until 60. The point of the glide path is to compare the volatility she carries if she could freeze equity at 75% against the regulated taper to 50%. The figures below are illustrative assumptions, not guaranteed returns, since NPS is market-linked and PFRDA does not declare a fixed rate.

Assume equity delivers 11% a year and the fixed-income classes (C and G) deliver 7% a year over the decade. Under a frozen 75% equity mix the blended expected return is roughly 10%, but the corpus carries the full swing of a three-quarters-equity portfolio. Under the regulated taper, equity averages about 62.5% across the ten years, the blended expected return is closer to 9.5%, and the worst-year drawdown is materially smaller because by age 58 only 55% sits in equity.

The glide path costs Anjali roughly Rs 7 lakh of expected terminal corpus on these assumptions, about 4.5% less, in exchange for sharply lower downside risk in the two or three years before she retires. For most subscribers that is a sensible trade, because a 25% equity crash in 2035 on a Rs 1.55 crore frozen-equity corpus would wipe out far more than Rs 7 lakh.

Now take the drawdown at 60 on the glide-path corpus of Rs 1.48 crore. Anjali withdraws the maximum 60% as a lump sum, which is Rs 88.8 lakh, entirely tax-free under Section 10(12A). The remaining 40%, Rs 59.2 lakh, buys an annuity. If the annuity service provider quotes 6.5% a year on a life annuity, her monthly pension is Rs 59.2 lakh times 6.5% divided by 12, which is about Rs 32,067 a month, or Rs 3.85 lakh a year, taxable at her slab. Because that annual figure sits below the Rs 12 lakh rebate threshold, the Section 87A rebate of up to Rs 60,000 means her NPS pension may attract no income tax if she has little other income.

A subscriber who wants more flexibility than a fixed annuity can compare the annuity route against a Systematic Withdrawal Plan from the lump sum using our annuity vs SWP calculator, and stress-test the full retirement income picture with the retirement drawdown calculator. The key behavioural lesson from the glide path applies to drawdown too: as the corpus moves from growth to income, cutting volatility is usually worth a small haircut in expected return.

FAQ

Why does NPS Active Choice cut the equity cap after age 50?

To manage sequence-of-returns risk. PFRDA holds the maximum equity allocation at 75% up to age 50, then tapers it by 2.5 percentage points a year to 50% by age 60. A near-retiree has little time to recover from an equity crash, so the regulator forces gradual de-risking to protect the corpus in the decade before withdrawal.

Can I keep 75% equity in NPS after I turn 50?

No. Under Active Choice the maximum permitted equity allocation falls automatically after age 50, reaching 52.5% at 59 and 50% at 60. There is no option to override the ceiling within NPS Tier I. If you want sustained high-equity exposure you would need to use a separate vehicle outside NPS, such as an equity mutual fund.

How is the NPS lump sum taxed at retirement?

The lump sum of up to 60% of the corpus withdrawn at age 60 is fully exempt under Section 10(12A) of the Income-tax Act, 1961. The mandatory minimum 40% annuity purchase is not taxed at the point of purchase, but the monthly pension it pays is taxable at your income-tax slab each year.

Is the Rs 50,000 NPS deduction available in the new tax regime?

No. The additional deduction of up to Rs 50,000 for self-contributions under Section 80CCD(1B) is available only under the old tax regime. Under the new tax regime you cannot claim 80CCD(1B), though the employer-contribution deduction under Section 80CCD(2), up to 14% of basic salary plus dearness allowance, is allowed in both regimes.

What is the difference between Active Choice and Auto Choice?

Active Choice lets you set your own allocation across Equity, Corporate Bonds, Government Securities and up to 5% Alternative Investment Funds, with equity capped at 75% to age 50. Auto Choice runs a mechanical life-cycle glide path through LC75, LC50 or LC25 funds, taking equity down to between 5% and 15% by age 55. Active Choice can hold 50% equity at 60; the most aggressive Auto Choice fund holds only 15% by 55.

Can I change my NPS Pension Fund Manager?

Yes, once per financial year. Both Active Choice and Auto Choice subscribers may switch their Pension Fund Manager and rebalance, subject to PFRDA rules. You can also move between Active and Auto Choice during the accumulation phase, though switching to Auto Choice immediately resets your allocation to that life-cycle fund's age-appropriate mix.

Does the equity glide path apply to NPS Tier II as well?

The age-linked equity ceiling described here applies to the Tier I pension account. Tier II is a voluntary, withdrawable savings account without the lock-in or the mandatory annuity, and its allocation rules differ. For retirement de-risking, the Tier I glide path is the one that protects your pension corpus in the run-up to age 60.