The National Pension System (NPS) has long been known as one of India’s most cost-effective retirement solutions, but recent changes have made it even more attractive for long-term investors. With low charges, flexible exit rules, and a steadily improving structure, NPS is increasingly being seen as a serious contender in retirement planning, especially for those who want disciplined, low-cost wealth creation.
Currently, NPS has around 2.1 crore subscribers, and the total Assets Under Management (AUM) stand at nearly ₹16 lakh crore. Considering India’s large population, this subscriber base is still relatively small. However, over the past few years, the Pension Fund Regulatory and Development Authority (PFRDA) has introduced several important reforms aimed at making NPS more investor-friendly and relevant in today’s financial landscape.
One of NPS’s biggest strengths is its extremely low cost. For the Tier 1 equity option, the annual expense ratio is close to 10 basis points, which is significantly lower than most mutual fund schemes. This low cost ensures that a larger portion of your returns stays invested and benefits from long-term compounding.
Another major advantage is accessibility. The minimum annual contribution is just ₹1,000, making NPS suitable even for small and first-time investors. Despite these benefits, NPS participation remains below 2% of India’s population, largely due to misconceptions around liquidity and exit restrictions.
Contrary to popular belief, NPS performance has been competitive. In the Tier 1 equity category, there are 10 pension fund managers, and their three-year annualized returns range between 12.5% and 16.5%. Over a longer horizon, six fund managers have delivered 10-year annual returns between 12.5% and 14.5%.
For a retirement-focused product, these returns are considered healthy, especially when combined with low costs and a disciplined investment structure.
Despite decent returns, NPS growth faced hurdles in the past. Limited liquidity, low distributor commissions, and rigid withdrawal rules reduced its appeal. One major concern for investors was that 40% of the retirement corpus had to be used to purchase an annuity, which often offers relatively lower returns.
Additionally, while 60% of the corpus could be withdrawn tax-free, the income generated from annuities is taxable. This tax treatment made many investors compare NPS unfavorably with mutual funds, which offer greater flexibility and better tax efficiency in certain scenarios.
NPS directly competes with mutual fund-based retirement solutions. Mutual funds score higher on liquidity, flexibility, and withdrawal customization, such as Systematic Withdrawal Plans (SWPs) that allow investors to manage post-retirement income efficiently.
However, when it comes to cost efficiency, NPS clearly has an edge. Its low expense ratio can make a meaningful difference in long-term wealth accumulation, especially over a 20–30 year investment horizon.
Recent reforms have addressed many of NPS’s earlier drawbacks:
Earlier Exit Option: Subscribers no longer need to wait until the age of 60. Exit is now allowed after 15 years of investment.
Higher Lump-Sum Withdrawal Limit: If your total NPS corpus is up to ₹8 lakh, you can withdraw the entire amount. Earlier, this limit was only ₹2 lakh.
Increased Withdrawal Percentage: If your corpus exceeds ₹12 lakh, you can now withdraw up to 80% as a lump sum. Earlier, the limit was 60%, with the remaining amount mandatorily invested in an annuity.
Reduced Annuity Dependency: Only 20% of the corpus needs to be used for annuity purchase under the new rules, giving investors greater control.
These changes significantly enhance flexibility and reduce one of the biggest deterrents to NPS adoption.
Another notable reform is the extension of the maximum investment age from 75 to 85 years. This means investors can continue contributing for an additional 10 years, allowing their money to compound longer. Withdrawals can also be planned more strategically, which is a major advantage for longevity planning.
NPS also enforces a minimum 15-year investment period, which encourages disciplined long-term investing—an essential factor in building a strong retirement corpus.
With low costs, improving flexibility, competitive returns, and recent investor-friendly reforms, NPS has evolved into a more balanced and practical retirement solution. While it may not completely replace mutual funds, it can play a crucial complementary role in a diversified retirement plan.
For investors seeking low-cost, long-term, and disciplined retirement savings, NPS now stands out as a smarter and more relevant option than ever before.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should consult a qualified financial advisor before making any investment decisions.
