Is the National Pension Scheme (NPS) a Good Investment?

Table of Content

1. What Is the National Pension Scheme (NPS)?

2. How Does NPS Work?

3. Is It Worth Investing In NPS?

4. Why NPS makes sense

5. What you should watch out for

6. How It Compares to Alternatives?

7. Conclusion

8. FAQs on NPS

NPS is a retirement scheme, backed by the Government of India (GOI) and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is a market-linked and defined contribution plan designed to help you build a long-term retirement corpus. But the big question remains—is NPS a good investment for your future?

Covered below are details of its core advantages, return potential and key limitations to assist you in assessing whether NPS is a good investment and how this scheme compares to popular alternatives—Equity Linked Savings Scheme (ELSS), Unit Linked Insurance Plan (ULIP), Fixed Deposit (FD) and Public Provident Fund (PPF).

According to the Annual Report of the National Pension System (NPS) Trust (2023–24), Assets Under Management (AUM) grew by more than 30%, reaching ₹11.73 lakh crores. The subscriber base even rose by 16%, surpassing 7.36 crore. This highlights the growing importance of retirement planning in India, as well as the widespread nationwide adoption of NPS.

What Is the National Pension Scheme (NPS)?

As mentioned above, NPS is a government-backed retirement savings scheme, specifically designed to help you build a secure income for your retirement. It was initially introduced on January 1, 2004, for new Central Government employees (except those in the armed forces). With effect from 1st May 2009, it has been opened to all Indian citizens, including Non-Resident Indians (NRIs), on a voluntary basis.

Note that the PFRDA regulates NPS under the PFRDA Act, 2013, and your contributions are managed safely as per the NPS Trust.

There are two kinds of NPS accounts:

• Tier I: This is the main NPS account meant for retirement savings. It offers tax benefits but comes with certain restrictions on when and how much you can withdraw, making it best suited for long-term goals.

• Tier II: This is a voluntary account that works well as a regular savings plan. You can invest and withdraw at any time. But it has zero tax benefits.

In simple terms, NPS offers a straightforward, low-cost, and tax-efficient mode to plan for your retirement with discipline and flexibility.

How Does NPS Work?

In case you are considering retirement planning and asking yourself this question—is it good to invest in the National Pension Scheme? Here is how this system functions in simple words.

Any Indian citizen falling between the ages of 18 and 70 years can join NPS by completing a Know Your Customer (KYC) process via registered Points of Presence (PoPs). Once enrolled, you are given a Permanent Retirement Account Number (PRAN), which you can use to invest in accounts as mentioned above, i.e., Tier I or Tier II.

Contributions get invested throughout four asset classes. They are Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Assets (A). You can either select your own asset allocation (active choice) or go for the auto choice option, which balances risk as you age (up to 75% in equity).

Investments are managed professionally by Pension Fund Managers (PFMs) and tracked by Central Recordkeeping Agencies (CRAs) under the NPS Trust.

At retirement (i.e., on reaching the age of 60), if your corpus is over ₹5 lakh, you are allowed to withdraw 60% (tax-free) while the remaining 40% must be used to purchase an annuity, which is taxable. Partial withdrawals (up to 25%) are permitted after three years for specific reasons. According to the rules of PFRDA, you can make a maximum of three such withdrawals in your NPS account in a lifetime.

So, is the NPS scheme good? With low costs, flexible options, and long-term growth, it certainly makes a strong case.

Is It Worth Investing In NPS?

In the case of salaried individuals, the NPS option stands out as one of the most tax-efficient as well as cost-effective retirement options. It is structured to encourage disciplined long-term savings while endowing flexibility in investment choices as well as guidance from fund managers. All of this makes it a compelling option for building a prudent retirement corpus.

Why NPS makes sense

• Triple tax benefit: You receive the benefit of tax deductions of up to ₹1.5 lakh as per Section 80CCD¹ (1) (part of the 80C limit), an exclusive ₹50,000 as per Section 80CCD(1B) and an additional deduction on employer contributions of up to 10% (or 14% for central government employees) as per Section 80CCD¹ (2).

• Minimal charges: NPS is among the cheapest retirement investment options. The fund management fees start at just 0.09%. As the fund size grows, the fee tends to drop to as low as 0.03%. This means more of your money remains invested and keeps growing over the long-term period through the compounding effect.

• Regulated: Backed by the GOI and managed by PFRDA-approved fund managers, NPS ensures regular NAV tracking and transparency.

• Equity exposure of up to 75%: Endows higher long-term return potential than conventional investment schemes—PPF or Employee Provident Fund (EPF).

• 1. Who can join NPS?

  Any Indian citizen (resident or NRI) falling between the ages of 18 and 70 years can open an NPS account.

  2. What tax benefits are available?

  You get tax deductions of up to ₹1.5 lakh under Section 80CCD¹ (1) (within the 80C¹ limit). An extra deduction of ₹50,000 is offered under Section 80CCD(1B). And in case of employer contribution, tax benefits are offered under Section 80CCD (2).

  3. When can you withdraw?

  You can withdraw after 60 years of age. But 40% of the corpus (if over ₹5 lakh) must be utilised to purchase an annuity. In case the corpus is less than ₹5 lakh, then 100% of lumpsum withdrawal is permitted.

  4. Can NRIs invest in NPS?

  • Limited liquidity: Tier-I NPS accounts are locked until age 60. This makes NPS a long-term commitment. Partial withdrawals are permitted just under specific conditions—higher education, critical illness or purchase of a home.
  • Mandatory annuity purchase: 40% of your corpus (if over ₹5 lakh) must be utilised for an annuity, and the annuity income is taxable. Note that the annuity income is taxable according to your income tax slab during retirement.
  • Equity cap: High-risk investors might view the equity ceiling of 75% limiting.
  • More complicated as compared to ELSS or PPF: NPS requires multiple decisions to be made—fund managers, asset allocation and withdrawal strategy. This makes it a bit more complicated. 

Automatic risk management: The life-cycle fund option automatically adjusts your equity-debt ratio as per age. This is just right for investors who are looking for a hands-off approach.

What you should watch out for

• Limited liquidity: Tier-I NPS accounts are locked until age 60. This makes NPS a long-term commitment. Partial withdrawals are permitted just under specific conditions—higher education, critical illness or purchase of a home.

• Mandatory annuity purchase: 40% of your corpus (if over ₹5 lakh) must be utilised for an annuity, and the annuity income is taxable. Note that the annuity income is taxable according to your income tax slab during retirement.

• Equity cap: High-risk investors might view the equity ceiling of 75% limiting.

• More complicated as compared to ELSS or PPF: NPS requires multiple decisions to be made—fund managers, asset allocation and withdrawal strategy. This makes it a bit more complicated.

How It Compares to Alternatives?

Not sure if NPS is the right fit for you? Let's stack it up against some popular alternatives:

ELSS – Fastest lock-in, market-linked

ELSS is perfect if you are comfortable with equity volatility. It offers 100% market exposure, a 3-year lock-in, and Long-Term Capital Gain (LTCG) tax at 12.5% above ₹1.25 lakh. Unlike NPS, there is no annuity, and you can withdraw funds freely after the lock-in period, which makes it more suitable for wealth creation with greater flexibility.

ULIPs – Insurance + investment combo

ULIPs offer both life insurance and market exposure. With a 5-year lock-in, they suit those wanting bundled benefits. However, higher charges—such as mortality and policy administration fees—reduce your actual return. It is a fit if you need insurance coverage, but not the best for pure retirement investing.

FD and PPF – For the safety-first investor

FDs are low-risk, but only tax-saver FDs (with a 5-year lock-in) offer 80C benefits. Regular FDs are liquid but do not qualify for tax deductions. PPF, on the other hand, gives EEE tax status but comes with a 15-year lock-in, with partial withdrawals allowed after 7 years.

Both options are prudent for the purpose of capital safety. But they might fall short on returns as well as flexibility compared to NPS.

Conclusion

NPS scores high on grounds—tax savings, long-term discipline and low-cost retirement planning—particularly, if you are looking for a government-regulated and professionally managed option.

It might not be suitable for those needing liquidity or bundled insurance. But as part of a well-balanced portfolio alongside ELSS and mutual funds, it is a smart and future-ready choice.

FAQs on NPS

1. Who can join NPS?

Any Indian citizen (resident or NRI) falling between the ages of 18 and 70 years can open an NPS account.

2. What tax benefits are available?

You get tax deductions of up to ₹1.5 lakh under Section 80CCD¹ (1) (within the 80C¹ limit). An extra deduction of ₹50,000 is offered under Section 80CCD(1B). And in case of employer contribution, tax benefits are offered under Section 80CCD (2).

3. When can you withdraw?

You can withdraw after 60 years of age. But 40% of the corpus (if over ₹5 lakh) must be utilised to purchase an annuity. In case the corpus is less than ₹5 lakh, then 100% of lumpsum withdrawal is permitted.

4. Can NRIs invest in NPS?

Yes, NRIs can invest in NPS—it is a low-cost, transparent, and professionally managed scheme, approved by PFRDA and managed by fund houses.

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Sources:

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https://npstrust.org.in/about-nps

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https://npstrust.org.in/benefits-of-nps

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https://npscra.nsdl.co.in/download/Investment-options-under-NPS.pdf

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https://economictimes.indiatimes.com/wealth/tax/mutual-fund-taxation-after-budget-2024-new-stcg-ltcg-rates-on-equity-debt-mfs-etfs-fund-of-funds-gold-funds-gold-etfs-explained/articleshow/112310878.cms?from=mdr

ARN- ED/08/25/26041