PFRDA notifies NPS Swasthya operational guidelines: what the new health-linked NPS scheme means for you

On 18 September 2026 the Pension Fund Regulatory and Development Authority notified Circular No. PFRDA/2026/49/NPS-SWASTHYA/01, titled "Operational Guidelines for NPS Swasthya under the National Pension System (NPS), 2026", moving the scheme out of the regulatory sandbox and into the live NPS architecture with immediate effect. NPS Swasthya bolts a mandatory super top-up health insurance policy onto a dedicated pension account, and it changes the drawdown maths for anyone weighing how to fund medical bills in retirement. This guide sets NPS Swasthya against the conventional route most savers use today, a plain NPS All Citizen account paired with a separately bought health cover, so you can judge which drawdown strategy fits your own numbers.

The Scheme Explained

NPS Swasthya is defined in Clause 3.6 of the 18 September 2026 guidelines as a "pension scheme for a specific purpose" introduced under Regulation 4A of the PFRDA (Exits and Withdrawals under the National Pension System) Regulations, 2015. Per the preamble on page 4 of the circular, it "seeks to enable subscribers to build a dedicated corpus for meeting retirement expenses while facilitating access to health insurance and healthcare-related services". The two moving parts, set out in Clause 4.2, are an investment account under an NPS Swasthya scheme and a separate super top-up health insurance policy, and Clause 4.3 makes the insurance policy mandatory for enrolment while keeping the two legally and operationally distinct.

Eligibility is wide. Clause 4.1 lets any individual eligible to join NPS enrol, and the standard insurance policy in Clause 30.1 sets a subscriber entry age of 18 to 70 years, with renewal permitted up to and including age 85. That 85-year ceiling mirrors the maximum exit age of 85 already built into the NPS exit framework, so the health-linked account is designed to run deep into retirement. The coverage unit is a family floater covering the subscriber, spouse and up to two dependent children; Clause 30.1(ii) expressly excludes parents.

The contribution floor is modest. Clause 5.1 requires a minimum initial contribution of the first-year insurance premium (inclusive of taxes), plus Rs 200 annual maintenance charge payable to the Health Benefit Administrator, plus Rs 1,000 towards the investment account. Clause 5.2 sets the minimum subsequent contribution at just Rs 10. Contributions are invested under the pattern prescribed for the Central Government Scheme, per Clause 6.1, which is the same conservative government-securities-heavy mandate that governs central government NPS money. On charges, Clause 7.1 lets the pension fund levy up to 0.08% per annum of assets under management, plus the Rs 200 HBA maintenance charge, on top of the usual All Citizen Model charges.

The super top-up is the distinctive feature. Clause 3.8 defines a super top-up as a plan that "covers total yearly medical expenses once a deductible threshold is crossed", assessed on aggregate spend across a policy year rather than per claim. The standard policy in Clause 30.1(iv) offers four tiers linking an Annual Aggregate Deductible to a family floater sum insured. To understand why the deductible matters, see the deductible glossary entry and the super top-up explainer.

The deductible is where the pension corpus does its work. Clause 8.1 lets a subscriber make partial withdrawals towards Eligible Healthcare Expenses, including out-patient and in-patient costs, and Clause 8.3 imposes no waiting period and no cap on the number of withdrawals. Clause 8.2 caps the cumulative partial withdrawal at 25% of the subscriber's own contributions. Crucially, Clause 8.4 says the money is never paid to the subscriber; it is settled directly with the hospital or healthcare provider. So the corpus is designed to absorb the deductible and the out-of-pocket gaps, while the super top-up carries the large hospital bills above the threshold. The insurer must be IRDAI-registered under Clause 3.4, and the policy commences no later than T+1 working days from enrolment per Clause 29.4.

Tax on Withdrawal

The guidelines are a PFRDA operational circular and do not themselves rewrite the tax code, so NPS Swasthya inherits the Income-tax treatment of the NPS exit framework it sits inside. Clause 13.1 states plainly that "the exit provisions applicable to non-Government subscribers under the PFRDA (Exits and Withdrawals under the National Pension System) Regulations, 2015, shall apply to NPS Swasthya." That anchors three tax rules that any retiree comparing schemes must model.

First, healthcare partial withdrawals. Because the Clause 8.2 cap is 25% of the subscriber's own contributions and medical treatment is a specified withdrawal purpose under the 2015 exit regulations, the withdrawal falls within Section 10(12B) of the Income-tax Act, 1961, which exempts partial withdrawals from an NPS Tier I account up to 25% of the employee's own contributions. Since Clause 8.4 routes the payment to the hospital rather than the subscriber, the healthcare drawdown reaches the provider without a tax leakage in the ordinary case.

Second, the lump sum on final exit. Under the NPS framework the exempt lump sum on normal exit is capped at 60% of the corpus under Section 10(12A), with the remaining 40% mandatorily applied to purchase an annuity. The PFRDA exit rules confirm this: for a non-government subscriber the maximum lump sum is 60% and the minimum annuity is 40%, with a full lump sum permitted only where the corpus is up to Rs 8 lakh (mid-band relief up to Rs 12 lakh allows a Rs 6 lakh lump sum). Because NPS Swasthya follows the same rules per Clause 13.1, any residual corpus that survives the healthcare drawdown is treated on exit exactly like an ordinary NPS balance.

Third, annuity income. The pension bought with the mandatory annuitisation portion is taxable at your slab rate in the year of receipt, whether you file under the old or new regime; there is no exemption for annuity payouts. Note one common misconception: the additional Section 80CCD(1B) deduction of up to Rs 50,000 for NPS contributions is available only under the old tax regime and is withdrawn entirely in the new regime. The circular does not extend or create any fresh deduction for NPS Swasthya contributions or for the super top-up premium, so subscribers should treat the deduction position as the standard NPS position pending any specific clarification from the Central Board of Direct Taxes. The table below summarises the treatment.

Worked Drawdown

Consider Anjali, who enrols in NPS Swasthya at age 55 in October 2026 choosing the Rs 1 lakh deductible and Rs 10 lakh sum insured tier from Clause 30.1(iv). Assume an illustrative first-year premium of Rs 24,000 (the premium is set by the IRDAI-registered insurer under Clause 31.1 and varies by the entry-age cohort). Her minimum initial contribution under Clause 5.1 is therefore Rs 24,000 premium plus Rs 200 HBA charge plus Rs 1,000 investment, and she chooses to add Rs 96,000 more to the investment account, funding Rs 97,000 of investable corpus in year one.

Anjali then contributes Rs 1,00,000 to the investment account each year for five years. To illustrate corpus growth we assume a 7% annual return, a conservative figure broadly in line with government-scheme NPS mandates; this is an assumption, not a guaranteed rate, and actual returns follow the Central Government Scheme pattern under Clause 6.1. The renewal premium in later years is funded from the corpus under Clause 31.5. The table tracks a single hospitalisation event in year five costing Rs 4,50,000.

In year five Anjali is hospitalised with a bill of Rs 4,50,000. The Annual Aggregate Deductible of Rs 1,00,000 must be met before the super top-up responds. Her cumulative own contributions across five years total Rs 4,97,000, and the Clause 8.2 ceiling of 25% permits a partial withdrawal of up to Rs 1,24,250, comfortably above the Rs 1,00,000 deductible. Under Clause 8.4 that Rs 1,00,000 is settled directly to the hospital from her corpus, exempt under Section 10(12B). The insurer then pays the balance of Rs 3,50,000 under the Rs 10 lakh sum insured, because a super top-up covers aggregate spend once the deductible is crossed. Anjali's corpus falls to roughly Rs 3,85,627 after the withdrawal, and her out-of-pocket cash outgo for a Rs 4,50,000 event is effectively nil beyond contributions she had already made.

Compare the conventional route. Had Anjali instead run an ordinary NPS All Citizen account and drawn the same Rs 1,00,000 deductible from a systematic withdrawal, she would need a standalone super top-up bought and renewed separately, and her drawdown discipline would rest on a self-managed systematic withdrawal plan. The Swasthya structure hard-wires the deductible funding into the pension account. You can model the residual pension corpus and safe withdrawal path with the retirement drawdown calculator, and if you also hold a defined-benefit style payout, the gratuity calculator reflects the Rs 20 lakh statutory cap under Section 10(10) of the Income-tax Act. For a fuller comparison of the two structures, this table isolates the differences.

FAQ

What happens to my NPS Swasthya account if I stop paying the insurance premium?

Clause 14.1 requires the pension fund to alert you at least 90, 60 and 30 days before renewal where funds may be insufficient. If the premium stays unpaid after the grace period and cover lapses, Clause 14.2 provides that the NPS Swasthya scheme is closed and merged into an NPS All Citizen account; where you hold no such account, the Swasthya scheme is itself converted into an All Citizen account, preserving the corpus.

Can I take the healthcare withdrawal as cash?

No. Clause 8.4 of the 18 September 2026 guidelines states the partial withdrawal amount "shall not be paid to the subscriber" and must be settled directly with the hospital, healthcare provider or other eligible entity through the prescribed fund-flow process. The 25% of own contributions ceiling in Clause 8.2 caps the cumulative amount, but there is no cap on the number of withdrawals under Clause 8.3.

Does the super top-up cover pre-existing conditions?

Clause 30.2(ii) sets a pre-existing disease waiting period of 12 months, alongside an initial waiting period of 30 days under Clause 30.2(i). Controlled Type 2 diabetes, hypertension, hyperlipidaemia and asthma that do not trigger enhanced underwriting under the Good Health Declaration are covered after 12 months per Clause 30.2(iv). There is no co-payment and no disease-specific sub-limit under Clause 30.1(viii).

How is a large hospitalisation handled when the corpus is small?

Clause 12.1 allows a premature exit where eligible in-patient expenditure in a single instance exceeds what a partial withdrawal permits. On premature exit, Clause 12.2 requires the accumulated corpus to be used first for the in-patient expense, with any remaining balance merged into an NPS All Citizen account. The super top-up sum insured, up to Rs 30 lakh on the top tier, is designed to carry costs above the corpus.

Is the annuity income from NPS Swasthya tax-free?

No. The mandatory annuity purchased from at least 40% of the corpus on normal exit produces pension income taxable at your slab rate under both the old and new regimes. Only the lump sum up to 60% of the corpus is exempt under Section 10(12A), consistent with the exit rules that Clause 13.1 applies to NPS Swasthya. Read the annuity glossary entry before locking in a payout.

Were sandbox subscribers migrated automatically?

Clause 16.1 discontinues the sandbox NPS Swasthya schemes on implementation of these guidelines. Clause 16.2 gives existing sandbox subscribers an option to migrate to a Swasthya scheme under the 2026 guidelines, and Clause 16.3 lets them instead merge into an NPS All Citizen account, with intermediaries required under Clause 16.4 to preserve records, benefits and insurance continuity.

Which regulator handles a claim dispute?

Clause 37.4 places grievance redressal for the claim settlement process with the insurer, governed by IRDAI regulations, while pension-side grievances route through the PFRDA Pension Sahayak platform under Clause 37.1. The Health Benefit Administrator provides a single grievance reference for the healthcare journey under Clause 37.5. The insurance and pension legs remain legally distinct throughout, as Clause 4.3 requires.