Pros and Cons of the NPS

NPS Overview

The National Pension Scheme (NPS) is a government-regulated, market-linked retirement savings system that helps individuals build a corpus for retirement. It is a voluntary retirement plan that allows eligible individuals to make contributions during their working years. At exit, subscribers can withdraw the permitted portion of the accumulated pension wealth as a lump sum or through approved withdrawal options and use the applicable portion for an annuity, depending on the exit type, NPS model and accumulated pension wealth.

Pros of Investing in the NPS Scheme

When you invest in the NPS scheme, all your savings are collected and managed in a pension fund. Understanding the pros and cons of the NPS can help you assess whether it suits your financial goals and risk appetite.

1. Professional NPS Fund Managers

   NPS contributions are managed by pension fund managers registered with the Pension Fund Regulatory and Development Authority (PFRDA). These fund managers operate under prescribed investment guidelines and regulatory requirements.

2. Market-Linked Return Potential

   NPS offers market-linked return potential through investments in asset classes such as equity, corporate debt and government securities. NPS returns are not fixed or guaranteed. The returns depend on the investment option, asset allocation, pension fund manager and market performance.

3. Low Minimum Contribution

   NPS allows you to start investing with a relatively low minimum contribution, with the requirements varying between Tier I and Tier II accounts.

   Tier I Account:

   • A Tier I NPS account can be opened with a minimum initial contribution of ₹500, subject to the applicable rules.
   • You can deposit money using a cheque, cash, or a demand draft.
   • After opening the account, the applicable minimums are ₹500 per contribution and ₹1,000 per year.

   Tier II Account:

   • You can open a Tier II account with ₹1,000.
   • Money can be deposited via cheque, cash, or a demand draft.
   • After opening the account, the minimum contribution for a Tier II account is ₹250, subject to the applicable rules.

4. Easy Documentation

   Eligible individuals can open an NPS account through authorised online or offline channels by completing the applicable registration and KYC requirements.

5. Wide Coverage

   Under the All Citizen Model, eligible Indian citizens and Overseas Citizens of India (OCIs) aged 18 to 85 years can subscribe to NPS, subject to the applicable eligibility and KYC requirements.

6. Regulations that Safeguard the Investments

   NPS is regulated by PFRDA, which prescribes rules for pension funds, investment options and subscriber protection. However, NPS returns are market-linked and are not guaranteed.

7. Easy Access and Portability

   Eligible individuals can subscribe to NPS through authorised Points of Presence and permitted online channels. NPS is portable across jobs and locations. A subscriber's Permanent Retirement Account Number (PRAN) remains the same when they change their employment, city or state.

8. Risk Assessment

   Under applicable NPS investment options, a portion of the corpus may be invested in equity to provide market-linked growth potential.

   There is a limit on how much of your money can go into equity:

   • Up to 75% equity exposure is permitted under the applicable Active Choice investment option for eligible subscribers.
   • Equity exposure for government-sector subscribers is subject to the investment options and limits applicable to their NPS model.

   Under Auto Choice/Life Cycle investment options, asset allocation changes with age according to the selected life-cycle strategy. The applicable allocation varies across the available life-cycle options.

9. Tax Benefits

   NPS tax benefits come under different sections of the Income Tax Act 2025, depending on the type of contribution and the tax regime chosen.

10. NPS Investment Options

    Based on their financial goals and risk appetite, subscribers can select applicable investment options and a pension fund manager. Every asset class comes with a particular investment limit. NPS investment options include:

    Active Choice

    • You decide how much to invest in each asset class.
    • You also choose the fund manager.
    • Asset classes you can choose:
      • E – Equity (stocks): High growth, high risk
      • C – Corporate Bonds: Moderate returns, moderate risk
      • G – Government Securities: Generally lower credit risk, but returns are market-linked.
      • A – Alternative Investment Funds (AIFs): Up to 5%

    Auto Choice / Life Cycle Choice

    If you're unsure how to invest, let the system decide based on your age. Your equity investment reduces as you get older.

    The available Life Cycle options include different risk profiles, such as:

    • Life Cycle 75 – High: Higher equity allocation at younger ages, which reduces progressively with age.
    • Life Cycle 50 – Moderate: A moderate equity allocation that reduces progressively with age.
    • Life Cycle 25 – Low: A lower equity allocation that reduces progressively with age.
    • Life Cycle – Aggressive (35E/55Y): An additional aggressive life-cycle option with age-based asset allocation.

11. Easy Maintenance of the Account

    When you open an NPS account, you are allotted a unique Permanent Retirement Account Number (PRAN), which can be used to access and manage your NPS account through the applicable CRA channels. The PRAN provides a single account identifier through which subscribers can access and manage their NPS account through applicable CRA channels.

12. Option of Opening Multiple Accounts

    NPS offers two types of accounts, allowing subscribers to choose between a retirement-focused account and a more flexible investment account.

    Tier I Account:

    • Tier I is the primary retirement account under NPS.
    • It is mainly for long-term retirement savings.
    • Withdrawals are restricted until retirement.

    Tier II Account (Optional Investment Account):

    • Tier II is an optional account that generally requires an active Tier I account and offers greater withdrawal flexibility, subject to applicable rules.
    • It offers more flexibility in withdrawals (like a savings account).

13. Withdrawal Exemptions

    Tier II generally offers greater withdrawal flexibility than Tier I. However, applicable withdrawal and tax rules may vary depending on the type of Tier II account.

14. Option to Change the Fund Manager

    Subscribers can choose an eligible pension fund manager and may change their fund manager, subject to the applicable NPS rules and procedures. This feature empowers individuals to make informed decisions and select a manager that aligns with their investment goals and preferences.

Disadvantages of the NPS

The NPS scheme has its own set of advantages and disadvantages when compared with other investment and pension options. A few pros have already been covered above, some of the disadvantages of NPS include:

1. Withdrawal Limits

   • You must be an NPS subscriber for at least 3 years to request a partial withdrawal, subject to the applicable NPS rules.
   • Before attaining 60 years, you can make up to 4 partial withdrawals from your NPS account, subject to a minimum gap of 4 years between withdrawals.
   • After attaining 60 years, partial withdrawals can be made any number of times until age 85, subject to a minimum gap of 3 years between withdrawals.
   • For an eligible partial withdrawal, up to 25% of the subscriber's own contributions, excluding returns or appreciation, may be withdrawn, subject to the applicable rules.
   • For subsequent partial withdrawals, you can withdraw up to 25% of the incremental own contributions made after the previous withdrawal, excluding returns or appreciation.

2. Taxation at the Time of Withdrawal

   The tax treatment and permitted lump-sum and annuity portions at NPS exit depend on the applicable exit rules and subscriber category. The earlier standard 60% lump-sum and 40% annuity framework should not be presented as a universal rule under the current NPS framework. Annuity income received by the subscriber is taxable according to the applicable income-tax provisions.

3. Account Opening Restrictions

   An individual is allotted a unique PRAN for NPS. The PRAN remains portable across employment and locations, while eligible subscribers may have access to multiple investment schemes under the applicable NPS framework.

4. Limited Exposure to Equities

   Under the applicable Active Choice investment option, equity exposure can be allocated up to 75%. Under Active Choice, equity exposure is capped at the applicable limit. Investors seeking a portfolio with a higher equity allocation may find this restrictive. However, multi scheme framework (MSF) schemes allow higher equity for non-government subscribers.

5. Complexity of Choosing the Best NPS Fund Manager

   NPS offers multiple pension fund managers and investment options, which can make the selection process difficult for investors unfamiliar with equity, debt and government securities. Investors may need to compare investment strategies, historical performance and risk before selecting a fund manager.

Who Should Consider Enrolling in NPS?

NPS can be suitable for individuals looking for a disciplined and structured approach to retirement savings. Investors should consider the NPS advantages and disadvantages before choosing the scheme.

• Young Professionals: Those with a long investment horizon can benefit from investing for retirement over several decades.
• Salaried Individuals: Employees whose employers contribute to NPS may use these contributions to build an additional source of retirement savings.
• Self-Employed Individuals: NPS provides a structured way to save for retirement.
• NRIs: Eligible NRIs can invest in NPS and build retirement savings while living abroad.