3 weeks ago
NPS gains edge over mutual funds as pension tag fades
Think of the National Pension System, or NPS, as a special piggy bank for retirement in India.
For a long time, people saw it as a boring, safe savings plan with small returns.
Now, NPS lets people put up to all of their money into stocks, just like mutual funds do.
Mutual funds are like a big toy box where people can take money out for many different goals.
NPS is meant mostly for one goal: having money when you stop working.
The government gives tax benefits to people who save through NPS, especially when their company also puts in money.
NPS also has very small fees, so almost all the money saved keeps growing.
New rules even let people take out some money before retirement for things like education or buying a first home.
After retirement, people can keep the money invested and take small amounts out regularly instead of taking it all at once.
So NPS and mutual funds can be used together, like teammates, for a comfortable retirement.
NPS equity exposure can now reach up to 100% in the high-risk variant under the Multiple Scheme Framework, effective for non-government subscribers from October 1, 2025, up from the earlier 75% ceiling.
The PPFAS Pension presentation shows NPS fund management costs of just 0.04% to 0.12% a year, with equity allocations delivering around 10% to 13% CAGR since inception.
Employer NPS contributions under Section 80CCD(2) are deductible up to 14% of Basic plus DA under the new tax regime, giving salaried employees a significant tax advantage.
An illustration assuming a 12% annual return shows a Rs 17,500 monthly corporate NPS contribution building a Rs 5.17 crore corpus versus Rs 3.56 crore through a mutual fund SIP from post-tax salary.
PFRDA approved the Retirement Income Scheme (RIS) on May 15, 2026, which would allow drawdown money to stay invested up to age 85, with equity starting at 35% at age 60 and falling to 10% from age 75.
- Who
- Indian investors, especially salaried employees in the 30-45 age group, and the CIO of PPFAS Pension Fund Managers Pvt. Ltd.
- What
- The National Pension System (NPS) is evolving into a more flexible, low-cost retirement product with higher equity limits, tax advantages and new income-drawdown options that make it a stronger alternative to mutual funds.
- Where
- India
- When
- The Multiple Scheme Framework took effect on October 1, 2025; PFRDA approved the Retirement Income Scheme on May 15, 2026; returns data is as of July 20, 2026.
- Why
- To help investors build retirement wealth efficiently and convert it into a steady income that can last 20 to 30 years after retirement, as lifespans lengthen.
NPS as the better retirement vehicle
Mutual funds as the better investment vehicle
Returns and wealth creation
NPS as the better retirement vehicle
NPS equity schemes have delivered double-digit returns (roughly 10%-13% CAGR since inception) with very low costs, so the old view of NPS as a low-return product is outdated.
Mutual funds as the better investment vehicle
NPS is still built for a narrow, retirement-only purpose, unlike mutual funds which are primarily wealth-creation vehicles, and the return and corpus figures are only illustrations, not guarantees.
Flexibility and liquidity
NPS as the better retirement vehicle
NPS has become far more flexible with up to 100% equity exposure, multiple schemes and fund managers, partial withdrawals, and systematic drawdown options like SLW and SUR.
Mutual funds as the better investment vehicle
Mutual funds still offer greater liquidity and a much wider range of investment choices, and can be used for pre-retirement goals, while NPS remains less liquid and locked into a retirement framework.
Choosing between the two
NPS as the better retirement vehicle
NPS makes particular sense for retirement-focused investors with long horizons, especially salaried employees whose employers contribute, because tax treatment can make the effective investment amount higher.
Mutual funds as the better investment vehicle
Mutual funds remain important for flexible goals and building a separate wealth pool, and the CIO himself argues NPS should complement rather than compete with mutual funds, so most investors should use both.
Key facts
- Fund management cost
- Around 0.04% to 0.12% per year
- Maximum equity exposure
- Up to 100% in high-risk variant (earlier 75%)
- Employer contribution tax deduction
- Up to 14% of Basic plus DA under Section 80CCD(2), new tax regime
- Exit rules (corpus above Rs 12 lakh)
- Up to 80% lump sum; at least 20% to annuity; deferral up to age 85
- Partial withdrawal
- Up to 25% of own contributions after 3 years for education, illness, disability, first home; tax-free
- RIS equity glide path
- 35% at 60, 25% at 65, 15% at 70, 10% from 75
- RIS approval
- PFRDA circular dated May 15, 2026; live once implementation date notified
- Historical equity returns
- ~10%-13% CAGR since inception; Tier I equity returns 8.46%-13.95%
Quotes
CIO of PPFAS Pension Fund Managers Pvt. Ltd.
Chief Investment Officer of a pension fund management firm
“"Yes, this is a real shift. Retirement planning in India is gradually moving beyond just building a large retirement corpus."”
financialexpress.com
“"People are living much longer now, so a 60‑year‑old retiree may need their savings to last 20‑30 years, not just 10 years."”
financialexpress.com
Sources
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