Where Your NPS and Atal Pension Yojana Money Is Actually Invested: Inside PFRDA's 2025 Master Circular on Investment Guidelines

When you contribute to the National Pension System (NPS) or the Atal Pension Yojana (APY), your money does not sit idle in a government account; it is invested across equity, bonds and government securities under a rulebook the Pension Fund Regulatory and Development Authority (PFRDA) updates regularly. The current rulebook is the PFRDA Master Circular PFRDA/Master Circular/2025/02/PF-01, dated 28 March 2025 and last updated on 17 September 2025, which consolidates investment guidelines for UPS, NPS and APY schemes covering Central and State Government (default), Corporate CG, NPS Lite, Atal Pension Yojana and the APY Fund Scheme. Understanding where your retirement rupee actually goes is the difference between drifting into retirement and steering toward it.

This guide compares the two pension architectures most working Indians hold — the market-linked NPS and the guaranteed-pension APY — explains the 2025 investment guidelines that govern both, sets out how each is taxed on withdrawal, and walks through a multi-year drawdown so you can see the numbers before you commit.

The Scheme Explained

The NPS, regulated by PFRDA since the agency's statutory establishment under the PFRDA Act 2013, splits your contributions across four asset classes defined in the 2025 Master Circular. Asset Class E holds equity and related instruments, Asset Class C holds corporate debt, Asset Class G holds government securities, and Asset Class A holds alternative investment funds such as REITs and InvITs. Under the Active Choice option a subscriber can direct up to 75% of the corpus to equity (Asset Class E) until age 50, after which the equity ceiling tapers down year by year; Asset Class A is capped at 5% of the corpus at all times.

Subscribers who would rather not pick allocations use Auto Choice, which runs three lifecycle funds that rebalance automatically with age. The Aggressive Life Cycle fund (LC75) starts at 75% equity, the Moderate fund (LC50) starts at 50% equity, and the Conservative fund (LC25) starts at 25% equity, with each fund cutting equity exposure as the subscriber approaches 60. You can model how either choice compounds over a working life using Oquilia's NPS calculator, and read the plain-English definition in our NPS glossary entry.

Government-sector subscribers are treated differently. Under the default scheme covered by the 2025 Master Circular, contributions of Central and State Government employees are managed by three designated pension funds — SBI Pension Funds, LIC Pension Fund and UTI Retirement Solutions — with equity exposure capped at 15% of the corpus and the balance directed predominantly to government securities and high-grade corporate bonds. This conservative pattern reflects the fiduciary caution PFRDA applies to mandated, non-discretionary subscribers.

The Atal Pension Yojana, launched on 9 May 2015 for unorganised-sector workers, sits on the same NPS plumbing but flips the promise. Instead of a market-linked corpus, APY guarantees a fixed monthly pension of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000 or Rs 5,000 from age 60, with contributions determined by the pension level chosen and the age of joining (permitted between 18 and 40). The APY Fund Scheme is invested under a government-notified pattern weighted heavily toward government securities and debt, which is why the pension can be guaranteed by the Government of India. Since 1 October 2022, income-tax payers are not eligible to join APY. The table below shows the official PFRDA contribution anchors for the highest Rs 5,000 pension tier.

Across both tiers, on the death of the subscriber the pension continues to the spouse, and on the death of both the accumulated corpus is returned to the nominee — an indicative Rs 8.5 lakh for the Rs 5,000 pension tier, per PFRDA's published APY framework. You can size your own commitment with the Atal Pension Yojana calculator.

Tax on Withdrawal

The tax treatment of NPS on exit is among the most generous in the Indian savings landscape. At superannuation (age 60), a subscriber may withdraw up to 60% of the accumulated Tier 1 corpus as a lump sum, and that 60% is fully exempt from income tax under Section 10(12A) of the Income-tax Act 1961, as available on incometax.gov.in. The remaining minimum 40% must be used to purchase an annuity from a PFRDA-empanelled annuity service provider; the lump-sum exemption is why NPS is often described as enjoying Exempt-Exempt-Exempt (EEE) status on the withdrawn portion.

The annuity itself is not tax-free. Pension received from the annuity is taxed as income in the year of receipt at the subscriber's applicable slab rate, whether under the new regime (where the Section 87A rebate is now Rs 60,000 for FY 2025-26, lifting the zero-tax threshold to Rs 12 lakh of taxable income) or the old regime. A useful relief: if the total Tier 1 corpus at age 60 is Rs 5 lakh or less, the entire amount can be withdrawn as a tax-free lump sum with no compulsory annuitisation. Partial withdrawals before 60 — up to 25% of the subscriber's own contributions, allowed up to three times — are exempt under Section 10(12B).

On the deduction side, contributions attract Section 80CCD(1) within the overall Rs 1.5 lakh Section 80CCE limit, plus an additional Rs 50,000 under Section 80CCD(1B) — but Section 80CCD(1B) is NOT allowed in the new tax regime; that Rs 50,000 deduction is available only under the old tax regime. Employer contributions under Section 80CCD(2), by contrast, are deductible under both regimes, up to 14% of basic salary plus dearness allowance following the Budget 2024 enhancement for the new regime. APY contributions are eligible for the same Section 80CCD(1) and 80CCD(1B) treatment, given APY's NPS architecture.

NPS vs APY at a Glance

The two schemes share the same regulator and the same 2025 investment rulebook, but they answer different needs. NPS is a market-linked accumulation vehicle where you bear the investment risk and keep the upside; APY is a defined-benefit guarantee where the Government of India bears the shortfall risk and caps your pension at Rs 5,000 a month. For a 30-year-old salaried professional in the 30% slab, NPS plus its Section 80CCD(1B) deduction (old regime) is usually the stronger play; for an unorganised-sector worker who wants certainty and is not an income-tax payer, APY's guarantee is the better fit.

Neither scheme is strictly better; the right choice depends on your slab, risk appetite and whether you value the upside of equity over the certainty of a fixed cheque. Many households run both — NPS for growth, APY as a guaranteed floor.

Worked Drawdown

Consider Anil, who starts contributing Rs 10,000 a month to NPS Tier 1 at age 35 and continues for 25 years to age 60. NPS returns are market-linked and not guaranteed, so the figures below use a clearly illustrative blended return of 9% per annum — your actual outcome depends on your asset mix under the 2025 investment guidelines and on market performance. At an assumed 9%, monthly contributions of Rs 10,000 over 300 months grow to roughly Rs 1.12 crore at age 60. The table traces the accumulation at five-year intervals.

At 60, Anil's Rs 1.12 crore corpus splits two ways under the NPS exit rules. He withdraws 60% — Rs 67.2 lakh — entirely tax-free under Section 10(12A). The remaining 40%, Rs 44.8 lakh, buys an annuity. At an illustrative annuity rate of 6% per annum (rates vary by provider and annuity option chosen, so treat this as indicative), that produces about Rs 2,68,800 a year, or roughly Rs 22,400 a month, which is added to his other income and taxed at his slab rate.

The drawdown decision does not end at the annuity. Anil could instead invest part of the tax-free Rs 67.2 lakh lump sum in a Systematic Withdrawal Plan (SWP) from a mutual fund, where only the capital-gains portion of each withdrawal is taxed — long-term equity gains above Rs 1.25 lakh a year are taxed at 12.5% under the Budget 2024 regime, versus the full-slab taxation of annuity income. Comparing a guaranteed-but-taxed annuity against a flexible SWP is the central drawdown trade-off; model both with Oquilia's annuity-vs-SWP calculator and stress-test the full corpus with the retirement drawdown calculator. For the meaning of the underlying terms, see the glossary entries for annuity and corpus.

For an APY subscriber, the arithmetic is simpler and the burden lighter. A 25-year-old choosing the Rs 5,000 tier contributes a fixed monthly amount until 60 and then receives Rs 5,000 a month for life, with the spouse covered and a nominee corpus of Rs 8.5 lakh afterwards — no market risk, no annuity-rate uncertainty, but also no upside if markets outperform. The choice between NPS and APY is ultimately a choice between participation and certainty.

FAQ

Where is my NPS money actually invested?

Across four asset classes defined in PFRDA Master Circular PFRDA/Master Circular/2025/02/PF-01 dated 28 March 2025: Asset Class E (equity, up to 75% in Active Choice until age 50), Asset Class C (corporate debt), Asset Class G (government securities) and Asset Class A (alternative funds, capped at 5%). Government-sector default subscribers have equity capped at 15%, with the rest in government securities and high-grade bonds.

Is the NPS lump sum at 60 really tax-free?

Yes — up to 60% of the Tier 1 corpus withdrawn at age 60 is fully exempt under Section 10(12A) of the Income-tax Act 1961 (incometax.gov.in). The mandatory 40% annuity, however, is taxed at your slab rate as you receive the pension each year.

Can I claim the extra Rs 50,000 NPS deduction in the new tax regime?

No. Section 80CCD(1B) is NOT allowed in the new tax regime; the additional Rs 50,000 deduction is available only in the old tax regime. Employer contributions under Section 80CCD(2) are deductible in both regimes, up to 14% of basic salary plus dearness allowance after the Budget 2024 change.

Who can still join the Atal Pension Yojana?

Indian citizens aged 18 to 40 with a bank account, except income-tax payers — since 1 October 2022, anyone who is an income-tax payer is barred from joining APY. The scheme guarantees a monthly pension of Rs 1,000 to Rs 5,000 from age 60.

What happens to my APY corpus when I die?

The guaranteed pension continues to your spouse after your death. On the death of both subscriber and spouse, the accumulated corpus is returned to the nominee — an indicative Rs 8.5 lakh for the Rs 5,000 pension tier under PFRDA's published APY framework.

Should I pick the annuity or an SWP for drawdown?

An annuity offers a guaranteed pension taxed fully at slab, while a Systematic Withdrawal Plan offers flexibility and taxes only the capital-gains portion of each withdrawal — long-term equity gains above Rs 1.25 lakh a year at 12.5%. The right answer depends on your tax slab and risk appetite; compare both on Oquilia's annuity-vs-SWP and retirement drawdown calculators.

How much equity can a government NPS subscriber hold?

Under the 2025 Master Circular's default scheme, Central and State Government employees' contributions are managed by SBI Pension Funds, LIC Pension Fund and UTI Retirement Solutions with equity exposure capped at 15% of the corpus, the balance going to government securities and corporate bonds.