PFRDA master circular sets investment rules for your NPS non-government sector pension corpus

The Pension Fund Regulatory and Development Authority (PFRDA) reset the rulebook for how your National Pension System money is invested on 10 December 2025, issuing Master Circular reference PFRDA/Master Circular/2025/06/PF-04, titled "Master Circular on Investment Guidelines under NPS in Non-Government Sector" (source: pfrda.org.in). It takes effect immediately and supersedes the earlier master circular dated 28 March 2025. If you hold an NPS Tier-I or Tier-II account outside the Central or State Government systems — the All Citizen Model or a corporate tie-up — these are the rules your pension fund manager must now follow with every rupee of your corpus.

This guide sets Active Choice against Auto Choice under the refreshed 10 December 2025 guidelines, then walks through how the money is taxed on the way out and a multi-year drawdown worked example. Model your own figures alongside it with the NPS calculator and the retirement drawdown calculator.

The Scheme Explained

The non-government sector (NGS) covers all NPS accounts other than Central/State Government (default), Corporate CG, NPS Lite and the Atal Pension Yojana, per paragraph 2 of the 10 December 2025 circular. Your money is spread across four asset classes defined in Part III of that document: Scheme E (equity), Scheme C (corporate debt), Scheme G (government securities) and Scheme A (alternative investment funds). Each class carries a tightly drawn investment universe rather than a free hand.

For Scheme E, the 10 December 2025 circular restricts equity to constituents of the NIFTY 250 index (and BSE 250 stocks not already in NIFTY 250). It further requires that 90% of Scheme E assets sit in the top 200 stocks of the NIFTY 250, leaving flexibility of up to 10% for the remaining eligible names. Equity mutual fund units are capped at 5% of Scheme E assets under management (AUM), and the combined holding of REIT units, equity-oriented Alternative Investment Funds and gold or silver ETFs is capped at a further 5% of Scheme E AUM. Exchange-traded derivatives are permitted only for hedging and only up to 5% of Scheme E assets by contract value.

Scheme G is anchored in central and state government securities; within it, a sub-category of "Government of India fully serviced bonds" is capped at 10% of Scheme G AUM, and gilt mutual fund units at 5%, per Part III of the 10 December 2025 circular. Scheme C holds listed corporate debt; a term deposit placed with any single scheduled commercial bank cannot exceed 10% of Scheme C AUM, and the combined holding of InvIT units, debt-oriented AIFs and Basel III Tier-I bonds is capped at 5% of Scheme C AUM.

Two prudential filters in the 10 December 2025 circular matter for every subscriber. The circular caps a pension fund's equity exposure to any single industry at 15% of its total AUM (measured at Level-5 of the NIC classification), and limits brokerage on equity trades to 0.03% of the transaction value inclusive of stamp duty and applicable taxes. These concentration limits begin to apply once a scheme's AUM crosses Rs 5 crore. Separately, whenever the NIFTY 250 index is reconstituted, pension funds must realign their equity portfolios to the new eligible list within six months.

Active Choice vs Auto Choice under the new guidelines

The 10 December 2025 circular governs the universe every pension fund may buy within the four asset classes; what it does not do is pick your split for you. That decision rests with the two investment modes an NGS subscriber has always chosen between — Active Choice, where you set the allocation across Schemes E, C, G and A yourself, and Auto Choice, where a lifecycle formula de-risks your allocation automatically as you age. Both modes draw from the identical NIFTY 250 equity universe and the identical sub-limits described above, because those limits are set at the asset-class level in Part III of the circular, not at the subscriber level.

The practical takeaway from the 10 December 2025 guidelines is that the quality floor is the same whichever mode you pick: the same top-200 NIFTY 250 concentration rule, the same 15% single-industry ceiling and the same 0.03% brokerage cap protect both an Active Choice and an Auto Choice investor. Because NPS is a defined-contribution arrangement, the mode you choose shapes the risk you carry to age 60, but the circular ensures neither mode can stray into illiquid or over-concentrated equity.

Tax on Withdrawal

The exit framework was itself amended on 19 December 2025 through the PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025 (source: pfrda.org.in press release, 19 December 2025). For a non-government subscriber exiting at superannuation, you may now commute up to 80% of the corpus as a lump sum, with a minimum of 20% compulsorily used to buy an annuity. If your total accumulated corpus is Rs 8,00,000 or less at exit, you may withdraw 100% as a lump sum with no annuity purchase required.

The tax treatment of that lump sum sits in the Income-tax Act. Up to 60% of the corpus withdrawn as a lump sum is tax-exempt under Section 10(12A) (source: incometax.gov.in). The sum applied to purchase the annuity is not taxed at the point of purchase; instead, the resulting annuity (pension) income is taxable at your applicable slab in each year you receive it, under both the old and the new tax regime. Note that because the Section 10(12A) exemption is capped at 60% of the corpus, commuting the full 80% now permitted means only the 60% slice is sheltered by that specific exemption.

Partial withdrawals before exit are handled separately. A subscriber may take up to 25% of their own contributions, after a minimum of three years in the scheme, up to four times before age 60, and those partial withdrawals are tax-exempt under Section 10(12B) (source: incometax.gov.in). A premature exit before age 60 reverses the headline split: a maximum of 20% may be taken as lump sum and a minimum of 80% must buy an annuity, unless the corpus is Rs 5,00,000 or less, in which case the full amount may be withdrawn.

One deduction trap is worth flagging because it drives the regime decision for contributors. The additional deduction under Section 80CCD(1B) for NPS contributions is available only under the old tax regime; it is not available in the new regime (source: incometax.gov.in). For a retiree receiving taxable annuity income, the new regime offers a Section 87A rebate of up to Rs 60,000 where total income does not exceed Rs 12,00,000, a 4% health and education cess, and a surcharge that is capped at 25% even for the highest incomes. The table below summarises the headline numbers.

Worked Drawdown

Take a non-government subscriber retiring at age 60 with a Tier-I corpus of Rs 1,00,00,000. The exit split under the 19 December 2025 amendment, structured for the most favourable tax outcome, takes 60% as a tax-free lump sum under Section 10(12A) and routes the balance to annuity, comfortably above the 20% minimum.

The Rs 40,00,000 annuity produces pension income that is taxed at slab each year, and under the new regime a retiree whose total income stays at or below Rs 12,00,000 pays no tax after the Section 87A rebate of up to Rs 60,000. The Rs 60,00,000 tax-free lump sum is then yours to deploy. A conservative retiree could park it in secured instruments — the Employees' Provident Fund rate is 8.25% for FY 2025-26, and the Public Provident Fund rate is 7.1% for the July to September 2026 quarter (both unchanged) — while a growth-oriented retiree might run a Systematic Withdrawal Plan from an equity fund.

The tax difference between the annuity route and a self-managed SWP is stark and worth modelling with the annuity-vs-SWP calculator. Annuity income is taxed in full at your slab. By contrast, long-term capital gains on equity funds are taxed at 12.5% only on the gain above an annual exemption of Rs 1,25,000. Suppose an illustrative SWP redeems Rs 6,00,000 in a year (returns are not guaranteed) and the embedded long-term gain component of those redemptions is Rs 2,00,000: the first Rs 1,25,000 of gain is exempt, and the remaining Rs 75,000 is taxed at 12.5%, which is Rs 9,375 plus 4% cess, or Rs 9,750 for the year.

The partial-withdrawal lever adds flexibility across the accumulation years. If a subscriber's own contributions reach Rs 30,00,000 after a decade, the 25% ceiling allows a tax-free partial withdrawal of up to Rs 7,50,000 under Section 10(12B), available up to four times before age 60 and subject to the three-year minimum tenure. Because NPS allows both entry and exit up to age 85, a subscriber who does not need the money at 60 can defer annuitisation and let the corpus continue compounding within the asset-class limits set by the 10 December 2025 circular.

FAQ

Does the 10 December 2025 PFRDA circular change my asset allocation automatically?

No. Master Circular PFRDA/Master Circular/2025/06/PF-04, dated 10 December 2025, sets the investment universe and prudential limits your pension fund must follow — the NIFTY 250 equity universe, the 90% top-200 rule, the 15% single-industry cap and the 0.03% brokerage limit. It does not alter your personal Active Choice or Auto Choice split; it supersedes the earlier master circular of 28 March 2025 and took effect immediately (source: pfrda.org.in).

How much of my NPS corpus can I now take as a lump sum?

A non-government subscriber exiting at superannuation may take up to 80% as a lump sum, with a minimum of 20% used to buy an annuity, under the PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025 (19 December 2025). If your total corpus is Rs 8,00,000 or less, you may withdraw 100%.

How much of the lump sum is tax-free?

Up to 60% of the corpus taken as a lump sum is exempt under Section 10(12A) of the Income-tax Act (source: incometax.gov.in). If you commute the full 80% now permitted, only the 60% slice is covered by that exemption.

Can I claim the Section 80CCD(1B) NPS deduction in the new tax regime?

No. The additional Section 80CCD(1B) deduction for NPS contributions is available only under the old tax regime and is not available in the new regime (source: incometax.gov.in).

How is my NPS annuity income taxed?

Annuity income is taxed at your applicable slab in the year of receipt, under both the old and new regimes. In the new regime, a Section 87A rebate of up to Rs 60,000 means no tax where total income does not exceed Rs 12,00,000; a 4% cess applies above that, and the surcharge is capped at 25%.

How often can I make partial withdrawals before I turn 60?

Up to 25% of your own contributions, after a minimum of three years in the scheme, and up to four times before age 60. Such partial withdrawals are tax-exempt under Section 10(12B) (source: incometax.gov.in).

What equity can my NPS fund actually buy under the new rules?

Under the 10 December 2025 circular, Scheme E is restricted to NIFTY 250 constituents (plus BSE 250 names not in NIFTY 250), with 90% of Scheme E assets required to sit in the top 200 NIFTY 250 stocks and up to 10% in the remaining eligible names. Equity mutual fund units are capped at 5% of Scheme E AUM.