The 2025-26 NPS Rule Changes, Read Through an NRI's Eyes: 100% Equity, the 80% Lump Sum, UPS, and Whether Any of It Beats a Mutual Fund SIP

A reader in Dubai messaged me in February with a screenshot of his NPS dashboard and one line: "They just allowed 100% equity, should I move everything in?" He is 34, has run a small NPS Tier I account since 2019 out of habit, and had read three breathless headlines about the October 2025 changes. The honest answer took two pages, because the rule changes are real and genuinely improve the product, and yet for him, an NRI on the new tax regime with a 25-year horizon, NPS is still the wrong place for the bulk of his retirement money. Both things are true at once, and that gap is what this guide is about.

The 30-second answer: From 1 October 2025, PFRDA's Multiple Scheme Framework lets NPS subscribers hold up to 100% equity, removing the old 75% cap, but only in a new MSF scheme with a 15-year minimum vesting lock, not in an existing account. PFRDA also raised the lump-sum withdrawal ceiling to 80% for corpuses above Rs 12 lakh, though the Income-tax Act still exempts only 60% under Section 10(12A), so the extra 20% is taxable at slab. The remaining portion buys a mandatory annuity whose pension is fully taxable. NRIs and OCIs can invest via NRE or NRO, but under the new tax regime the 80CCD(1) and 80CCD(1B) deductions are gone. For most NRIs, a mutual fund SIP beats NPS once you price in the annuity lock-in and the lost deduction.

This is news analysis, not an NPS primer. If you have never opened an account and want the mechanics, the NPS for NRIs guide covers eligibility, the NRE/NRO routing and the account-opening steps. Here I am going to take the cluster of changes from late 2025 and early 2026, read each one specifically through an NRI's lens, put real rupee numbers on the tax that the headlines skip, and finish with a decision: when NPS earns its place in an NRI's portfolio and when a plain index fund quietly wins.

The 100% equity headline is real, but it comes wrapped in a 15-year lock

For a decade the strongest argument against NPS was structural: the equity allocation was capped at 75%, and even that required choosing Active Choice and manually holding the line. A 34-year-old saving for a retirement 26 years out has no business holding 25% in government and corporate bonds, yet that is what the default lifecycle funds did, and the 75% ceiling capped the upside even for those who fought for it. Over a long horizon that drag is the difference between a comfortable corpus and a merely adequate one.

The Multiple Scheme Framework that PFRDA rolled out from 1 October 2025 removes the cap. Private-sector, corporate and self-employed subscribers, the categories that almost every NRI falls into, can now opt for schemes with up to 100% equity. This is a genuine improvement and it closes the single biggest gap between NPS and a direct equity fund.

Read the fine print before you celebrate, because there are two catches that the headlines bury. First, you cannot turn your existing account up to 100%. The older common schemes keep the 75% cap; to get 100% equity you open a new scheme under the MSF, which means your old corpus and your new contributions may sit in different buckets with different rules. Second, the MSF schemes carry a minimum vesting period of 15 years, and during that window you cannot switch between MSF schemes, though you can switch back to a common scheme. For a young NRI that 15-year horizon is fine; for someone within sight of 60 it is a real constraint layered on top of the existing lock to age 60. The freedom to hold more equity arrives chained to less flexibility on when and how you move it.

The 80% lump sum sounds generous until you read the Income-tax Act

The second change that made the rounds: PFRDA now lets you withdraw up to 80% of your corpus as a lump sum at exit, provided the corpus exceeds Rs 12 lakh, leaving only 20% for the mandatory annuity instead of the old 40%. On its face this is the answer to the loudest complaint about NPS, the forced annuitisation. Halve the annuity, keep more cash, problem solved.

It is not solved, and this is the trap that almost no NRI is told about. PFRDA writes the withdrawal rules; the Income-tax Act writes the tax rules, and the two have not been reconciled. Section 10(12A) still exempts the NPS lump sum only up to 60% of the corpus. So if you pull 80%, the slice between 60% and 80%, that extra fifth of your corpus, is taxable at your slab rate in the year you withdraw it. You gained access to the money and simultaneously created a tax bill that the old 60% rule never produced. As of early 2026 this mismatch has not been officially resolved, so treat the 80% figure as a regulatory permission, not a tax-free entitlement.

Put real numbers on it. Take an NRI, call her Anjali, retiring at 60 with a corpus of Rs 1,00,00,000. Under the classic structure she withdraws 60%, Rs 60,00,000, entirely tax-free, and annuitises Rs 40,00,000. Under the new 80% option she withdraws Rs 80,00,000. The first Rs 60,00,000 is still tax-free, but the additional Rs 20,00,000 is added to her Indian income for that year. If that pushes her into the 30% slab, she pays roughly Rs 6,00,000 plus cess on money she could have left in the annuity bucket untouched. The extra liquidity cost her about Rs 6,24,000 in tax for the privilege. The counterfactual is stark: had she taken the standard 60% and annuitised 40%, her exit-year tax on the lump sum would have been zero. Whether the bigger lump sum is worth a six-figure tax hit depends entirely on what she does with that Rs 20,00,000, and for most people parking it in a taxable account does not beat the deferral.

SLW: the genuinely useful change nobody markets

The change I think actually helps NRIs most got the least coverage. Systematic Lump Sum Withdrawal, SLW, lets you draw down the 60% lump-sum component in instalments, monthly, quarterly, half-yearly or annually, rather than taking it all at exit, and the schedule can now run out to age 85 in recent rule updates, with annuity purchase deferrable to age 75. Because SLW draws from the already-tax-exempt 60% bucket, those periodic payouts come out tax-free, and the corpus you have not yet withdrawn stays invested and keeps compounding.

For an NRI this matters more than for a resident, because it lets you turn the lump sum into a tax-free income stream that you control, rather than handing 40% to an insurer at a fixed annuity rate the day you turn 60. You decide the cadence, you keep the equity exposure on the undrawn balance, and you can repatriate the proceeds through your NRE or NRO account as they arrive. If you are going to use NPS at all, SLW plus annuity deferral is the configuration that salvages the most value from it. The product is far more flexible at the exit end than its reputation suggests; the rigidity that remains is the mandatory annuity slice, and that slice is the heart of the case against NPS, which we come to below.

UPS is not for you, and it is worth saying plainly

A lot of the 2025-26 NPS noise was actually about the Unified Pension Scheme, effective 1 April 2025. It is a guaranteed-pension option, 50% of average basic pay after 25 years of qualifying service, inflation-indexed, with family pension, funded by a 10% employee contribution matched by government plus an additional pool contribution. It reads like a return to a defined-benefit pension, and for the people it covers it is a meaningful upgrade.

It does not cover you. UPS is for Central Government employees under NPS, with an option window that closed for existing employees and retirees around 30 November 2025. An NRI working for a private employer in London, Dubai, Toronto or New York is structurally ineligible, full stop. I include it only because the headlines blur "NPS changes" and "UPS launch" into one story, and I have had readers ask whether they can get the guaranteed 50% pension. You cannot. For the NRI audience, UPS is context, not an option, and any comparison you make should be NPS versus mutual funds, never UPS versus anything.

NRI and OCI eligibility: still fine, with two wrinkles that bite

The eligibility basics are unchanged and the NPS for NRIs guide has the full walkthrough, so I will not re-tread the NRE/NRO mechanics here. Two points genuinely matter for the 2026 reader, because both can quietly undo years of saving.

The first is the OCI wrinkle. OCIs are permitted to invest in NPS, but if you transition from resident Indian to OCI you generally cannot continue on the same NPS account; the status change forces a reset of how the account is held. There is also some residual inconsistency in the official guidance on PIO eligibility, so if you hold a PIO card rather than OCI, confirm your specific status with the CRA before you assume you qualify. This is exactly the kind of edge where a blog, including this one, should send you to the registrar rather than guess.

The second is the minimum-contribution trap, which catches the part-time NRI saver constantly. A Tier I account requires at least Rs 6,000 a year, and if you miss it the account is frozen until you pay the minimum plus a small penalty to reactivate. NRIs who opened NPS in a burst of discipline and then forgot about it across a busy posting abroad routinely return to find a frozen account. It is recoverable, but it is friction, and it is one more reason NPS rewards the consistent saver and punishes the casual one. Funds routed through your NRE account remain freely repatriable; funds through NRO sit under the USD 1 million per financial year repatriation limit, which becomes relevant at exit when you want to move the proceeds out.

The tax on the way out, decoded for a non-resident

Here is where the headlines stop and the part that costs real money begins. Three separate slices of your NPS money are taxed three different ways, and as an NRI each carries a cross-border twist.

The 60% lump sum is tax-exempt in India under Section 10(12A). For an NRI that exemption holds in India, but the receipt may still be reportable in your country of residence, and a few jurisdictions do not recognise the Indian exemption, so a tax-free-in-India payout is not automatically tax-free in your hands. The US in particular tends to look through foreign retirement wrappers.

The 40% annuity (or 20%, if you used the 80% lump-sum route) is not taxed when the annuity is purchased, but the monthly pension it pays is fully taxable as income in the year of receipt. This is the structural flaw of NPS for everyone, and it is sharper for an NRI. That pension is Indian-source income, so India taxes it and deducts TDS, and it is also potentially taxable at home. A DTAA can relieve the double tax: under the India-US treaty, annuity income is generally taxable only in the country of residence, so a US-resident NRI can apply, with a Tax Residency Certificate and Form 10F, to shift the taxing right to the US and stop Indian TDS on the annuity. The UK and Canada treaties have their own annuity articles and outcomes differ, so this is country-specific and not a blanket relief. The DTAA mechanics are the same machinery covered in the DTAA and Form 10F context within the capital gains guide, and they are worth getting right because annuity income runs for life.

The 80CCD deductions on the way in are the other half of the tax story, and for the new-regime NRI they have largely evaporated. Under the new tax regime, which is now the default, there is no deduction under 80CCD(1) or 80CCD(1B), the very Rs 1.5 lakh-plus-Rs 50,000 break that was NPS's main selling point. The only NPS deduction that survives the new regime is the employer contribution under 80CCD(2), up to 14% of salary. A salaried NRI employed abroad has no Indian employer routing NPS contributions, so in practice that surviving deduction is unavailable to most of this audience. The deduction that justified NPS for a resident on the old regime is simply not there for a new-regime NRI, and any honest comparison has to strip it out.

NPS versus a mutual fund SIP, with the numbers that decide it

Now the comparison the Dubai reader actually wanted. Set NPS (configured well, 100% equity via MSF) against a plain equity index fund or diversified equity mutual fund SIP, for an NRI on the new tax regime, over a long horizon. Here is the trade-off in one view.

Feature	NPS (MSF, 100% equity)	Equity mutual fund SIP
Max equity exposure	Up to 100% (since Oct 2025)	100% always
Entry tax break (new regime)	Effectively none for most NRIs	None either way
Lock-in	To age 60, plus 15-yr MSF vesting	None; sell anytime
Exit: lump sum	60% tax-free, up to 80% allowed (extra 20% taxed at slab)	Whole corpus accessible
Exit: forced annuity	20% to 40% must buy annuity	None
Gains taxation	Annuity pension fully taxed at slab	12.5% LTCG above Rs 1.25 lakh
Cost	Very low (0.03% to 0.09% fund mgmt)	Low for index (0.1% to 0.2%), higher for active
Control at retirement	Partial; annuity is mandatory	Full

The cost column is the one point genuinely in NPS's favour: its fund-management charges are among the lowest of any pooled product in India, well under an index fund's expense ratio, and over decades that gap compounds. If cost were the only axis, NPS would win.

It is not the only axis, and the annuity axis dominates. Put numbers on a like-for-like saver. Take an NRI investing Rs 1,00,000 a year for 25 years, both routes earning the same 11% on equity. Roughly Rs 1,00,000 a year compounding at 11% for 25 years reaches a corpus of about Rs 1,14,00,000 in either vehicle, because the underlying equity returns are similar and NPS's lower fees roughly offset the index fund's small drag, so call the corpus broadly comparable for this illustration.

At 60, the mutual fund investor owns the full Rs 1,14,00,000 outright. She sells in tranches, pays 12.5% long-term capital gains tax on gains above Rs 1.25 lakh a year, and faces no annuity, no lock, no forced product. The NPS investor must convert at least 20%, Rs 22,80,000 at the new minimum, into an annuity. At a typical Indian annuity rate of around 6%, that Rs 22,80,000 throws off roughly Rs 1,36,800 a year for life, taxed at her slab every year, with the principal locked in the insurer's hands and difficult to repatriate. Had she instead kept that Rs 22,80,000 in the index fund and drawn it down herself, she would control the capital, pay 12.5% on gains rather than slab on the whole payout, and be able to leave the balance to her heirs. The annuity converts a flexible, lightly-taxed equity pot into a rigid, fully-taxed, low-yielding income stream. That conversion, not the equity cap and not the fees, is the real cost of NPS, and the rule changes of 2025-26 reduce it (from 40% to a possible 20%) without removing it.

The second number that decides it is the lost deduction. For a resident on the old regime, the Rs 50,000 under 80CCD(1B) was real money back, often Rs 15,000 a year in tax saved, and that subsidy genuinely tilted the maths toward NPS. For a new-regime NRI that subsidy is zero. Take it away and NPS is competing with mutual funds on pure investment merit, where it carries a mandatory annuity that the mutual fund does not. The product was always partly a tax-shelter play; remove the shelter and the lock-in stands exposed.

Edge cases

You are still on the old tax regime. A minority of NRIs with significant Indian-source income, rent, business, capital gains, deliberately stay on the old regime to use deductions. If you are one of them and you have Indian income to shelter, the 80CCD(1B) Rs 50,000 deduction is live again and NPS's case strengthens materially. This is the cleanest scenario where NPS beats a plain SIP, because you are getting a real tax subsidy the mutual fund cannot match.

You distrust your own discipline. The annuity lock that I have spent this guide criticising is, for a specific person, a feature. If you know you would drain a flexible corpus by 65, a mandatory annuity that pays you for life regardless is a guardrail worth its tax cost. NPS as a small, deliberate "I cannot touch this" sleeve of a larger portfolio is defensible. NPS as the whole retirement plan is not.

The 80% withdrawal mismatch may be fixed. The PFRDA-versus-Income-tax-Act gap on the 60%-versus-80% exemption is an unresolved drafting lag as of early 2026, and it is the kind of thing a Finance Act can align with one line. If Section 10(12A) is amended to exempt 80%, the extra-20% tax disappears and the larger lump sum becomes genuinely attractive. Watch the Budget; until the Act changes, plan on the 60% exemption and treat anything above it as taxable. The Budget 2026 round-up for NRIs tracks whether this and the new-regime deduction position move.

US and Canada residents face a wrapper problem. Beyond the annuity, NRIs in the US and Canada should know that foreign retirement accounts can trigger reporting and, in some readings, current taxation that ignores the Indian deferral. The annuity pension's DTAA treatment helps, but the accumulation phase can create home-country complexity that a UAE or UK resident does not face. Factor your country's treatment of foreign pension wrappers before committing decades of contributions.

The closing read

The honest read is that the 2025-26 changes made NPS a better product and still left it the wrong default for most NRIs. The 100% equity option closes the old performance gap, SLW and annuity deferral make the exit far more flexible, and the fees remain the lowest in the market. None of that overturns the two facts that decide it: under the new tax regime the entry deduction that justified NPS is gone for almost every NRI, and the product still forces a fifth to two-fifths of your corpus into a low-yielding, fully-taxable, hard-to-repatriate annuity for life.

So for most NRIs, the recommendation is a diversified equity mutual fund or index fund SIP as the core retirement engine, because it gives you the same equity exposure, full control at 60, 12.5% LTCG treatment instead of slab-rate annuity income, and nothing locked into an insurer. Use NPS only in two cases: you are still on the old tax regime with Indian income to shelter, in which case the Rs 50,000 deduction tilts the maths back; or you genuinely want the annuity as a discipline guardrail on a small slice of the portfolio, not the whole thing. If you do use it, run 100% equity through an MSF scheme while young, defer the annuity, and draw the lump sum via SLW to keep it tax-free. And if you are weighing NPS against your broader plan, read it alongside building an India corpus as an NRI and retirement planning across two countries, because the annuity decision only makes sense in the context of where you will actually retire.

Related guides

• NPS for NRIs: eligibility, NRE/NRO routing and account opening
• NRI retirement planning across two countries
• Building an India corpus as an NRI
• Budget 2026: what changed for NRIs
• Capital gains tax for NRIs on shares and mutual funds
• ITR filing for NRIs: AY 2026-27
• All News and analysis
• All Investments guides
• All Taxation guides

This guide is educational and general in nature. It is not individual financial or tax advice. NPS rules changed materially across 2025 and early 2026, several PFRDA permissions are not yet matched by amendments to the Income-tax Act, and the right choice depends on your tax regime, residency, country of residence and treaty position. Confirm your specific situation with a qualified financial adviser or chartered accountant before acting.