The National Pension System (NPS) is a defined-contribution retirement savings scheme. Introduced initially for new Central government employees in 2004, it was extended to all citizens in 2009. NPS has evolved into a low-cost, market-linked investment platform that combines elements of mutual funds, provident funds and traditional pension products.

Like mutual funds, NPS has undergone several changes over the last few years. The regulator, the Pension Fund Regulatory and Development Authority (PFRDA), has steadily refined the product to transform from a basic pension accumulation vehicle into a comprehensive retirement solution.

Recent initiatives such as NPS Vatsalya for minors, Multi Scheme Framework (MSF) that allows subscribers to maintain multiple investment baskets, and the Retirement Income Scheme (RIS), which enables phased withdrawals after retirement, reflect this evolving approach.

And yet, NPS remains one of the least-understood financial products among retail investors. While mutual fund folios rose 90 per cent to 27.5 crore in the three years to April 2026, the subscriber base under the NPS All Citizen model grew 71 per cent to 50.7 lakh during the same period.

For investors beginning their retirement journey, understanding how NPS works, how it invests, the returns it has generated and the choices available at retirement is essential before deciding whether it deserves a place in their portfolio.

Here we focus more on the non-government subscribers including All Citizen and corporate models.

NPS structure

Individuals aged between 18 and 85 can join the NPS system. Broadly, the NPS journey has two stages: The accumulation phase and the decumulation (the process of gradua withdrawal) phase.

During the accumulation phase, subscribers make periodic contributions through their working years, either monthly, quarterly, half-yearly or annually. These contributions are invested in market-linked instruments and managed by professional pension fund managers, enabling the retirement corpus to grow over time.

The decumulation phase begins when a subscriber exits the system. While exit is generally permitted at age 60, the rules vary across subscriber categories. A portion of the accumulated corpus must be used to purchase an annuity that provides a regular pension. Subscribers may also defer lump-sum withdrawals and annuity purchase until the age of 85, as per latest norms. An NPS account remains active until the subscriber attains 85 years of age, after which it is closed.

How does NPS invest

NPS contributions are invested through professional pension fund managers, with subscribers having the flexibility to choose both the fund manager and the asset allocation. The pension fund management industry currently comprises 10 players: SBI Pension, UTI Pension, LIC Pension, HDFC Pension, ICICI Prudential Pension, Kotak Pension, Aditya Birla SL Pension, Axis Pension, Tata Pension and Max Life Pension Fund.

Every subscriber is required to open a Tier-I account, which serves as the primary retirement account and offers tax benefits. Withdrawals from this account are restricted. Subscribers may also open a Tier-II account, which functions as a voluntary savings account with greater liquidity but limited tax advantages.

Investments are allocated across asset classes that are now classified as common schemes such as equity (E), corporate debt (C) and government securities (G). Alternate Assets (A) was discontinued effective December 25, 2025. Pension managers offer these asset classes separately in both Tier-I and Tier-II accounts.

Subscribers under All Citizen and corporate models can choose between two investment approaches. Under Active Choice, you can plan and choose on how your contribution is to be invested. You can choose the pension manager, the schemes as well as the percentage allocation in the asset classes. However, allocation to E is capped at 75 per cent, while you can allocate up to 100 per cent into C and G. This option suits those who are comfortable managing their own asset allocation.

Auto Choice in NPS is a lifecycle-based investment option where asset allocation is automatically adjusted based on age. Equity exposure is higher when the investor is young and gradually reduces as retirement approaches. Within Auto Choice, investors under All Citizen Model can select from four lifecycle variants based on risk appetite. These include Life Cycle 75 (High), which begins with higher equity exposure; Life Cycle 50 (Moderate); Life Cycle 25 (Low) with a conservative allocation; and a newer Life Cycle Aggressive option, which allows relatively higher equity exposure over a longer period. These funds follow a predefined glide path, automatically rebalancing equity and debt over time, making Auto Choice suitable for investors seeking a hands-off, disciplined approach to retirement investing.

How to open an NPS account

An NPS account can be opened online through the eNPS portals operated by Protean, KFintech and CAMS, as well as through banks and fintech platforms that act as Points of Presence (PoPs).

Subscribers can open an account using Aadhaar, PAN or DigiLocker authentication. Aadhaar-based digital onboarding has made account opening largely paperless and can often be completed within minutes.

Alternatively, one can opt for the offline route through banks and authorised PoPs, where forms are submitted and verification is done physically. Link for registration portals: https://npstrust.org.in/open-an-nps-account. Minimum contribution is ₹250 at the time of onboarding. If you don’t contribute at least ₹1,000 a financial year to your NPS Tier-I account, it can become inactive and stop accepting transactions.

Subscribers can track their NPS investments by logging into the CRA portal or mobile app for real-time account details, and they also receive annual transaction statements and SMS/email updates on contributions and NAV changes.

Before opening the account, investors should decide on three key aspects: The pension fund manager, the investment option (Active Choice or Auto Choice) and nominee details. These can be changed later, but having clarity upfront makes the process smoother.

Withdrawal framework

The PFRDA 2025 framework for non-government subscribers, including All Citizen Model, marks a clear shift toward flexibility while retaining the core retirement discipline of NPS. A subscriber can opt for a normal exit after attaining 60 years, superannuation, or completing at least 15 years of subscription, effectively introducing a vesting-based exit alongside age-based exit. At this stage, only 20 per cent of the accumulated pension wealth is mandatorily annuitised, with the balance 80 per cent available as lump-sum or structured withdrawals, offering significantly higher liquidity. However, for Central government employees, normal exit is linked to retirement from service or attaining the age of 60, wherein the 40 per cent of the accumulated pension wealth is mandatorily annuitised.

Subscribers can defer both withdrawal and annuity purchase until age 85, without making fresh contributions, allowing the remaining corpus to continue participating in market-linked growth.

Premature (voluntary) exit in NPS is allowed before meeting normal exit conditions, but with restrictions. At least 80 per cent of the corpus must be annuitised, with only 20 per cent allowed as lump-sum, ensuring retirement income discipline. Full withdrawal is permitted for small balances of ₹5 lakh or less. On death, the entire corpus is paid to nominees or legal heirs, with no mandatory annuity, though they may opt for annuity or structured payouts.

Annuity procedure

The annuity component of NPS is designed to provide a steady post-retirement income stream, ensuring retirees do not deplete their savings too quickly. However, it also limits flexibility.

Annuity Service Providers (ASPs) are life insurers managing annuity contributions and pay regular pensions to subscribers after retirement or resignation.

Currently, 15 ASPs, including LIC, ICICI Prudential Life, HDFC Life, SBI Life, Tata AIA Life and Bajaj Allianz Life, offer nearly 15 annuity variants for NPS subscribers. Since retirees are likely to remain associated with an ASP for 25-30 years, the choice warrants careful consideration. Besides annuity rates and payout options, factors such as financial strength, investment performance, technology capabilities and customer service of ASPs should be evaluated.

Before purchasing an annuity, subscribers must assess their future income needs, compare available payout options and carefully review contract terms. Annuity rates depend on factors such as age, purchase price, chosen option and prevailing interest rates. Typically, purchasing an annuity at a younger age results in a lower pension payout.

Subscribers can opt for monthly, quarterly, half-yearly or annual payouts. Pension payments are generally fixed for life. Options that continue income to a spouse after the subscriber’s death offer lower payouts, while “Annuity for Life without Return of Purchase Price” provides the highest pension. Once selected, an annuity option cannot be changed. Annuity products typically generate 5-7 per cent annual returns, and the income is taxable.

Recently, PFRDA relaxed annuity surrender norms, permitting exits in cases of critical illness of the annuitant or a family member, and for pre-October 24, 2024, annuity policies that contain an explicit surrender provision.

SLW and RIS

PFRDA introduced the Systematic Lump-Sum Withdrawal (SLW) facility in 2023, allowing NPS subscribers to retain the eligible non-annuitised lump-sum portion of their retirement corpus within NPS and withdraw it periodically, instead of taking it all at once.

The structure is simple and similar to a mutual fund SWP, the facility enables monthly, quarterly, half-yearly or annual withdrawals while the remaining corpus continues to remain invested.

In May 2026, the PFRDA went a step further. It introduced the RIS, allowing retirees to invest their corpus in a predefined life-cycle fund and make systematic withdrawals. Called RIS Steady, it follows a glide-path strategy in which equity exposure gradually declines with age, while allocations to safer assets such as G-Secs increase. The objective is to strike a balance between generating inflation-beating returns and preserving capital, while preventing retirees from becoming either overly conservative or excessively aggressive in managing their retirement savings.

Under RIS, the withdrawals work in two methods. One is Systematic Payout Rate (SPR). Here, the annual withdrawal rate depends on your age. At 60, the payout rate works out to about 4 per cent that increase as you age. The second method is Systematic Unit Redemption (SUR). When you opt for it, your corpus is converted into units and a fixed number of units is redeemed every payout period. It is like the SWP (Systematic Withdrawal Plan) of mutual funds.

Lower cost structure

NPS is among the cheapest investment products available to Indian investors. Opening an NPS account typically costs around ₹200, while annual record-keeping and administrative charges are generally about ₹400. Accounts opened through banks and other PoPs may also attract a servicing fee of up to 0.20 per cent of AUM. Direct eNPS accounts, by contrast, tend to be the lowest-cost option.

The investment management fee (IMF) under NPS has long been among the lowest in the Indian investment landscape. Under the revised fee structure effective April 2026, pension funds can charge non-government sector subscribers up to 0.12 per cent on assets up to ₹25,000 crore, with the rate declining to 0.08 per cent, 0.06 per cent and 0.04 per cent as AUM rises through higher slabs. Even after accounting for administrative and record-keeping expenses, the overall cost of investing through NPS works out to roughly 0.3 per cent of AUM.

This compares favourably with the average expense ratios of equity MFs, which are around 1.3 per cent for regular plans and 0.73 per cent for direct plans. Debt funds, meanwhile, charge about 1.1 per cent and 0.6 per cent respectively. While the difference in costs may seem marginal in any given year, over a working life of three decades or more, lower expenses can significantly boost the final retirement corpus through the power of compounding. For instance, a ₹10-lakh investment, growing at 12 per cent annually for 25 years, becomes about ₹1.70 crore, while the same investment at 11.5 per cent (just 50 bps lower due to higher charges) grows to only ₹1.52 crore, creating a gap of nearly ₹18 lakh.

Performance and portfolio composition of fund options

Under the NPS All Citizen Model, subscribers can invest in three asset classes through both Tier-I and Tier-II accounts: E, C and G.

NPS earlier offered ‘A’, which invested in instruments such as Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Additional Tier-I (AT1) bonds and securitised debt. However, it was discontinued in December 2025 due to its limited investment universe and scalability challenges. To ensure continuity, the regulator integrated these exposures into E and C to invest up to 5 per cent of their corpus in such instruments.

Over the years, the NPS investment universe has expanded considerably, though the regulatory framework remains conservative given its retirement-focused objective.

Equity (E): Fund E began as a passive strategy tracking benchmark indices such as the Nifty 50 and Sensex. It has since evolved into an actively-managed fund. Under current regulations, pension fund managers can invest in stocks that are part of the Nifty 250 and BSE 250 universes. They can also allocate up to 5 per cent of assets collectively to REITs, InvITs, Category I and II Alternative Investment Funds (AIFs), and gold and silver ETFs.

Based on 10-year rolling return analysis using the last 13 years of NAV data, Tier-I Fund E schemes delivered an average annualised return of 13.5 per cent, marginally below the Nifty 100 TRI’s 13.8 per cent. Among pension fund managers, HDFC Pension delivered the strongest performance, followed by UTI Pension and Kotak Pension.

Corporate Bonds (C): This primarily invests in listed corporate debt issued by public sector enterprises and private companies. The permissible universe also includes REITs, InvITs, municipal bonds, rupee bonds issued by international banks, PSU debt ETFs, Basel-III AT1 bonds and debt-oriented Category I and II AIFs, subject to prescribed limits.

While Fund C can invest in securities rated AA and above, up to 10 per cent of assets may be allocated to bonds rated between A and AA-. In practice, however, portfolios are heavily tilted towards top-rated AAA securities. Interest-rate calls are limited, with portfolio-modified duration typically maintained between four and six years.

Government Securities (G): Fund G invests primarily in Central and State government securities. Fund managers have flexibility to choose maturities ranging from one year to as long as 50 years, though most securities are held until maturity. Current portfolio-modified duration generally ranges between eight and 11 years. The scheme can also invest up to 10 per cent of assets in government-backed entities such as Food Corporation of India (FCI) and MTNL. In addition, up to 5 per cent of assets may be invested in gilt or long-duration debt mutual funds.

Both debt-oriented NPS funds have outperformed comparable mutual fund categories over the long term. Ten-year rolling return analysis shows that Tier-I Fund C generated an average annualised return of 8.6 per cent, comfortably ahead of the 7.6 per cent delivered by corporate bond mutual funds (direct plans). Similarly, Fund G posted an average return of 8.8 per cent, exceeding the 8.1 per cent return from direct gilt mutual funds.

Asset allocation remains one of the most important decisions for NPS subscribers. Younger investors with long investment horizons can benefit from a higher allocation to Fund E up to 75 per cent under active choice, while those nearing retirement may prefer a greater allocation to Fund C and Fund G to reduce volatility and protect accumulated savings. For investors who do not wish to manage allocations actively, NPS also offers Auto Choice life-cycle funds, where equity exposure automatically declines with age.

Multi Scheme Framework and NPS Vatsalya

MSF, introduced in October 2025, gives non-government NPS subscribers greater flexibility and customisation without sacrificing cost efficiency. Earlier, investors were restricted to a single-account structure with predefined schemes and a maximum equity allocation of 75 per cent.

MSF represents a major shift. It allows pension fund managers to launch differentiated strategies, while subscribers can hold multiple schemes within the same NPS account. Existing investors may continue with common schemes and simultaneously invest in MSF offerings. The framework creates a mutual fund-like investment universe, including 100 per cent equity strategies, diversified and thematic funds, sectoral mandates, hybrid products, commodity-linked strategies and varied debt options.

MSF schemes are available in both Tier-I and Tier-II. In Tier-I, they carry a mandatory 15-year lock-in, with exits under standard NPS rules. After the vesting period, up to 80 per cent of the corpus can be withdrawn, while at least 20 per cent must be used to purchase an annuity.

Of the 19 schemes launched so far, 16 are in Tier-I and three in Tier-II. The Tier-I offerings are broadly classified as equity-oriented, aggressive hybrid and moderate hybrid funds. For younger investors, the ability to take 100 per cent equity exposure is a significant change that could improve long-term returns. Given their limited track record, investors may prefer to watch performance before making significant allocations.

NPS Vatsalya allows parents or guardians to open and manage an NPS account for minors, with contributions made on their behalf until adulthood. The account follows Tier-I structure of All Citizen Model. Investments are deployed across E, C and G. All 10 NPS managers offer the fund option that can allocate to equity between 50 per cent and 75 per cent. On attaining majority, the account can transition into a regular NPS account. It emphasises long-term compounding discipline, low costs and portability, but outcomes depend heavily on continuity of contributions and asset allocation choices.

The biggest trade-off with NPS is liquidity and flexibility. The product is designed to keep investors locked into a retirement-focused structure, limiting access to money before retirement. At exit, a mandatory portion of the corpus must be used to purchase an annuity, locking retirees into products that typically offer modest returns and taxable income.

Tax advantage

For non-government NPS subscribers, the tax treatment under the Income-Tax Act, 2025, broadly continues the EET (Exempt–Exempt–Taxable) framework, with certain rationalisation and renumbering of provisions explains, Sanjiv Chaudhary, Chartered Accountant..

According to Chaudhary, the NPS deduction of ₹50,000 under Section is in addition to the overall ceiling of ₹1.5 lakh.

*Individual’s contribution qualifies for tax deduction up to 10 per cent of salary (Basic + DA).

* Employer’s contribution qualifies for tax deduction in the hands of employee up to 10 per cent of salary (Basic + DA) under the old taxation regime and up to 14 per cent of salary (Basic + DA) under the new taxation regime.

Individuals who are self-employed and contributing to NPS are eligible for tax deduction up to 20 per cent of gross income within the overall ceiling of ₹1.5 lakh and additional deduction up to ₹50,000.

Partial withdrawals are permitted under PFRDA regulations for specified purposes, out of which only up to 25 per cent of the subscriber’s self-contributions are exempt from tax.

At retirement or normal exit, PFRDA permits non-government subscribers to withdraw up to 80 per cent of the accumulated corpus as lump-sum, the Income-Tax rules exempt only up to 60 per cent and 20 per cent of corpus is taxable as per applicable slab rate. The exempt portion of the lump-sum withdrawal continues to be exempt under the NPS provisions.

The corpus used for annuitisation is not taxable at the time of purchase of the annuity. However, the annuity/pension received thereafter is fully taxable in the year of receipt under the head “Income from Other Sources”, says Chaudhary.

Published on June 6, 2026