Pros and Cons of the NPS

NPS Overview

The National Pension System (NPS), popularly known as the National Pension Scheme, is a government-backed savings scheme to help people grow their own pension fund for a secure retirement. It is a voluntary plan that provides services where working people can make regular contributions while in employment years.

After retirement, this can be used to withdraw a portion of the savings while the balance pays them a monthly pension. In such a way, NPS provides a regular income in old age. It's important to know what the positive and negative sides are in NPS and carefully select a fund manager for the pension fund after comparing their performance before jumping in.

NPS Calculator

Your Age

Years

18 Years 59 Years

Enter Your Age

Monthly Investment

₹

₹500 ₹10L

Enter Investment Per Month

Expected Return on Investment

%

5% 15%

Expected Return on Investment

Percentage of Corpus Allocated for Pension

%

40% 100%

Enter Corpus Percentage

Expected Return from Pension

%

5% 15%

Enter Annuity Return

₹0

Your Monthly Pension

View Plans

₹0

Your Monthly Pension

View Plans Your Pension Calculation

Your Pension Calculation

Total Investment

Returns Earned

Maturity Amount

Maturity Amount split (Lumpsum & Pension)

60%

Lumpsum Amount

At the age of 60 Yrs

40%

Pension Wealth

At the age of 60 Yrs

View Plans

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. Let's look at some of the main benefits (pros) of investing in NPS in simple points below.

1. Experienced and Best NPS Fund Managers

   The funds contributed by subscribers are managed by a team of professional, qualified, and experienced NPS fund managers who are among the best in the industry. The Pension Fund Regulatory and Development Authority (PFRDA) has strict rules that these fund managers must follow. This ensures your savings are safe and in good hands.

2. Higher Returns

   Higher returns may be possible on investments in Tier 2 accounts of the National Pension System (NPS) scheme. These returns can add up over time, giving you a sizable nest egg when you're ready to retire. In the same way, the money in the Tier 1 account is saved up for retirement. A significant portion of NPS investments is allocated to the equity market, which often results in returns that are considerably higher compared to the Employee Provident Fund (EPF).

3. Low Investments

   Tier 1 Account:

   • You can open a Tier 1 NPS account with just Rs. 500.
     
     
   • You can deposit money using a cheque, cash, or a demand draft.
     
     
   • After opening the account:
     
     
   • Minimum Rs. 500 per contribution.
     
     
   • Minimum Rs. 1,000 per year.
     
     

   Tier 2 Account:

   • You can open a Tier 2 account with Rs. 1,000.
     
     
   • Money can be deposited via cheque, cash, or a demand draft.
     
     
   • After opening the account:
     
     
   • Minimum Rs. 250 per contribution.

4. Easy Documentation

   A person can easily enter the scheme through multiple avenues. They can go to the NPS CRA Login page, or for the manual process, they would only need to fill out the NPS form and submit the identity and address proof.

5. Wide Coverage

   Anyone who lives in India or has an NRI account can invest in the plan. As a pension plan, it covers people from the ages of 18 to 60. Initially, it was only for the "Government of India" employees, but later anybody, including freelancers, self-employed people, and businessmen, could invest in the scheme.

6. Regulations that Safeguard the Investments

   All investments in the NPS scheme are secured through regulations. Therefore, subscribers enjoy better returns, which are also safeguarded.

7. Easy Access

   The scheme is easily available, and one can easily subscribe to it by reaching nearby public sector or private sector banks or online through an NPS CRA login.

8. Portability

   Even if an individual changes their employment, city, or state, the NPS CRA login or PRAN continues to remain the same.

9. Risk Assessment

   In NPS, your money is partly invested in equity (stocks) to get better returns.

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

   • 50% to 75% equity cap for general investors.
   • Maximum 50% equity cap for government employees.

   To reduce risk as you grow older, the equity portion is gradually reduced:

   • Starting from the year you turn 50, equity exposure reduces by 2.5% every year.

   This rule helps balance risk and returns as you approach retirement.

10. Tax Benefits

    Section	Applicable To	Deduction Limit	Included In	Example
    80CCD(1)	Salaried and self-employed individuals contributing to NPS	Up to 10% of Basic + DA for salaried; up to 20% of gross income for self-employed	Part of the ₹1.5 lakh limit under Section 80CCD(1)	Isha earns ₹9,00,000 (Basic + DA). 10% of this = ₹90,000. She can claim ₹90,000, but it counts towards the overall ₹1.5 lakh deduction limit.
    80CCD(1B)	Any individual investing in NPS	Additional deduction of ₹50,000	Over and above the ₹1.5 lakh limit	Isha has already exhausted the ₹1.5 lakh limit via EPF, ELSS, and PPF. She invests ₹50,000 more in NPS and claims it separately under 80CCD(1B). Total deduction = ₹1.9 lakh.
    80CCD(2) – Old Tax Regieme	Salaried employees whose employers contribute to NPS	Up to 10% of Basic + DA	Not included in the ₹1.5 lakh or ₹50,000 limits	Isha's Basic + DA is ₹10,80,000. Employer contributes 10% = ₹1,08,000. She can claim ₹1,08,000 separately under Section 80CCD(2).
    80CCD(2) – New Tax Regime	Salaried employees under the new tax regime	Up to 14% of Basic + DA	Not included in the ₹1.5 lakh or ₹50,000 limits	If the employer contributes 14% of ₹10,80,000 = ₹1,51,200. Isha can claim this full amount as a deduction under Section 80CCD(2) under the new regime.
    Total Tax Benefit	Salaried individuals using all provisions	₹1.5 lakh (80CCD(1)) + ₹50,000 (80CCD(1B)) + Employer's Contribution (80CCD(2))	Combined benefits across sections	Isha's possible total deduction: ₹90,000 (80CCD(1)) + ₹50,000 (80CCD(1B)) + ₹1,08,000 or ₹1,51,200 (80CCD(2)) = ₹2.48–₹2.91 lakh depending on regime.

11. Multiple Funds of NPS

    Based on the individual's financial goals, one can select an asset class and then the best NPS fund manager. Every asset class comes with a particular investment limit. NPS include:

    Option A: 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: Safe and stable
      
      
    • A – Alternative Investments (REITs, CMBS, etc.): Higher risk, limited to 5% only

    Option B: Auto Choice

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

    There are three risk profiles under Auto Choice:

    • LC75 – Aggressive (More equity when younger)
      
      
    • 75% equity till age 35
      
      
    • Reduces gradually after that
      
      
    • LC50 – Moderate
      
      
    • 50% equity till age 35
      
      
    • Balanced approach
      
      
    • LC25 – Conservative
      
      
    • 25% equity till age 35
      
      
    • Very low risk

12. Easy Maintenance of the Account

    When you invest in the NPS, you are allotted your own Permanent Retirement Account Number (PRAN) through the NPS CRA login. The systematic pension investment plan provides for easy investments and helps retired and elderly people to make monetary transactions with the least effort.

13. Option of Opening Multiple Accounts

    Tier 1 Account (Mandatory Pension Account):
    
    

    • This is compulsory for all NPS subscribers.
    • It is mainly for long-term retirement savings.
    • Withdrawals are restricted until retirement.
      
      

    Tier 2 Account (Optional Investment Account):
    
    

    • This is optional and can only be opened after a Tier 1 account is active.
    • It offers more flexibility in withdrawals (like a savings account).

14. Withdrawal Exemptions

    There is an NPS lock-in period, however, any amount can be withdrawn from the investment (Tier 2) account, which makes the scheme even more lucrative.

15. Option to Change the Fund Manager

    Subscribers have the flexibility to choose the best pension fund manager for their National Pension System account, and even have the option to change their fund manager if they wish to do so. 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 cons or disadvantages when we compare it to the other investment/pension options available.

1. Withdrawal Limits

   • You must be an NPS subscriber for at least 3 years to request a partial withdrawal.
   • You can withdraw up to 3 times from your NPS account during your entire subscription period.
   • You can withdraw up to 25% of your own contributions (not your employer's contributions).
   • Between two partial withdrawals, you can withdraw only 25% of the amount you contributed during that specific period.

2. Taxation at the Time of Withdrawal

   While NPS offers tax benefits during the investment phase, there's a tax disadvantage at the time of withdrawal:

   • You can withdraw up to 60% of the total NPS corpus tax-free.
   • But the remaining 40% must be used to buy an annuity (pension plan).
   • Here's the catch:
     The monthly pension (annuity income) you receive from this 40% is fully taxable as per your income tax slab.

3. Account Opening Restrictions

   A person can maintain a single NPS account through an NPS CRA login in their lifetime. While the PRAN can be easily ported across geography and jobs, 1 single individual will get a single PRAN.

4. Limited Exposure to Equities

   The investment limit on equities has been confined to 75%. This may be a significant issue for individuals in their 20s-30s. This implies a possible loss of opportunity to gain exposure to the equity markets.

5. Complexity of Choosing the Best NPS Fund Manager

   Many people are not aware of the financial terms relating to equities, debt, securities, and others. Hence, they fail to choose the best NPS fund manager for their NPS investments.

Secure Your Retirement Today

Start Investing ₹6,000/month

Get Pension ₹60,000/month+

Including Life Cover

View Plan

+Standard T&A Applied

Best NPS Fund Managers

One must choose the best NPS fund manager while investing. Let's look at top NPS fund managers. It is hard to declare an out-and-out best pension fund manager for NPS, but we can share the names of topmost fund managers.

• Aditya Birla Sun Life Pension Management Limited
• Axis Pension Fund Management Limited
• HDFC Pension Management Company Limited
• ICICI Prudential Pension Funds Management Company Limited
• Kotak Mahindra Pension Fund Limited
• LIC Pension Fund Limited
• Max Life Pension Fund Management Limited
• SBI Pension Funds Private Limited
• TATA Pension Management Limited
• UTI Retirement Solutions Limited

NPS Fund Manager Performance

1. NPS Fund Manager Performance: Central Government Scheme

   SBI Pension Fund	UTI Retirement Solutions	LIC Pension Fund
   1-year return	10.27%	10.90%	10.88%
   3-year returns	10.17%	10.44%	10.49%
   5-year returns	8.87%	9.23%	9.41%

   Returns as on 9th May, 2025.

2. NPS Fund Manager Performance: State Government Scheme

   SBI Pension Fund	UTI Retirement Solutions	LIC Pension Fund
   1-year	10.17%	10.96%	10.89%
   3-year	10.11%	10.48%	10.50%
   5-year	8.75%	9.19%	9.33%

   Returns as on 9th May, 2025.

3. 3. NPS Fund Manager Performance: Tier-I Government Bonds

   Best Fund Managers	Returns (%)
   	1-year	3-year	5-year
   Birla Sun Life Pension Scheme	11.68%	9.96%	7.09%
   HDFC Pension Fund	11.77%	9.93%	6.94%
   ICICI Prudential Pension Fund	11.82%	9.79%	6.86%
   Kotak Pension Fund	11.07%	9.68%	6.87%
   LIC Pension Fund	12.11%	10.08%	7.03%
   SBI Pension Fund	11.97%	10.01%	6.93%
   UTI Retirement Solutions	12.17%	10.32%	6.91%
   Axis Pension Fund	11.14%	NA	NA
   DSP	12.08%	NA	NA
   Tata	11.60%	NA	NA

   Returns as on 9th May, 2025.

4. NPS Fund Manager Performance: Tier-I Equity Plans

   Best Pension Fund Managers~	Returns (%)
   	1-year	3-year	5-year
   Birla Sun Life Pension Scheme	8.21%	16.16%	21.81%
   HDFC Pension Fund	9.02%	16.59%	22.90%
   ICICI Prudential Pension Fund	7.87%	17.41%	23.86%
   Kotak Pension Fund	10.36%	18.11%	23.83%
   LIC Pension Fund	7.89%	16.26%	23.67%
   SBI Pension Fund	2.89%	14.28%	20.85%
   UTI Retirement Solutions	19.42%	18.03%	23.94%
   Axis Pension Fund	9.16%	NA	NA
   DSP	19.85%	NA	NA
   Tata	6.63%	NA	NA

   Returns as on 9th May, 2025.

5. NPS Fund Manager Performance: Tier-II Equity Plans

   Best Pension Fund Managers~	Returns (%)
   	1-year	3-year	5-year
   Birla Sun Life Pension Scheme	9.10%	16.71%	22.22%
   HDFC Pension Fund	8.92%	16.66%	22.90%
   ICICI Prudential Pension Fund	7.46%	17.28%	23.75%
   Kotak Pension Fund	10.04%	18.05%	23.65%
   LIC Pension Fund	8.15%	16.15%	23.66%
   SBI Pension Fund	5.61%	15.24%	21.52%
   UTI Retirement Solutions	8.57%	17.04%	23.38%
   Axis Pension Fund	10.75%	NA	NA
   DSP	22.10%	NA	NA
   Tata	6.74%	NA	NA

   Returns as on 9th May, 2025.

6. NPS Fund Manager Performance: Tier-II Government Bonds

   Best Pension Fund Managers~	Returns (%)
   	1-year	3-year	5-year
   Birla Sun Life Pension Scheme	11.69%	9.85%	7.08%
   HDFC Pension Fund	12.04%	9.99%	6.92%
   ICICI Prudential Pension Fund	11.88%	9.82%	6.92%
   Kotak Pension Fund	11.09%	9.61%	6.80%%
   LIC Pension Fund	12.25%	10.19%	6.98%
   SBI Pension Fund	11.99%	10.07%	6.92%
   UTI Retirement Solutions	11.73%	10.06%	6.78%
   Axis Pension Fund	11.64%	NA	NA
   DSP	12.46%	NA	NA
   Tata	11.66%	NA	NA

   Returns as on 9th May, 2025.

Key Takeaway

The National Pension Scheme (NPS) is an important instrument used for long-term retirement savings. It is effective especially for those who would like to save in a structured, regulated environment, with minimal tax exposure. While considering the NPS, an individual should balance the benefits and disadvantages, analyze their own financial goals and risk appetite, and do thorough research in order to make the most of the NPS to have a comfortable retirement.