National Pension System

Everything You Need To Know About The National Pension System

Retirement planning is easier when you start early. NPS, or the National Pension System, is the government’s longest-running effort to build a habit of long-term savings across the country. It is a market-linked retirement plan where contributions are invested in a mix of equity, corporate bonds, and government securities, managed by professional Pension Fund Managers to grow your savings steadily over time.

Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS is low-cost, tax-efficient, and now more flexible than ever, helping individuals – whether salaried, self-employed, or freelancers – systematically accumulate a retirement corpus while balancing growth and risk.

This instrument enforces the discipline needed for compounding to work its magic. It comes at the lowest possible charges, or what one might call an expense ratio. It falls under the EEE (Exempt-Exempt-Exempt) category – giving you a rare edge by keeping your returns completely free of capital gains tax.

Let’s take a look at its key features:

Power of Compounding

Even small, regular contributions grow exponentially over time because your returns start earning returns, turning modest savings into a substantial retirement corpus over decades

Lowest Costs

Fund management fees just 0.01–0.09% vs 1–2% for mutual funds

Tax-free at all stages (EEE)

Contributions, growth, and partial withdrawals are tax-efficient

Greater Flexibility (Post 2025 reforms)

Option for exit after 15 year tenure, 100% equity under MSF, multiple PRANs under one PAN and the option to withdraw 80% lumpsum

Equity + Debt Mix

Balanced growth and safety over time

NPS 2.0: More Flexible, More Personalized

The National Pension System has undergone significant updates in 2025 to provide more flexibility and personalization options for subscribers. These changes make NPS more accessible and tailored to individual needs.

Subscribers can now enjoy greater flexibility in investment choices, with expanded options for asset allocation and more personalized portfolio management. The system now offers enhanced features for tracking and managing your retirement savings.

The new updates also simplify the account opening process and provide better support for subscribers throughout their NPS journey. With these improvements, NPS continues to be one of the most comprehensive retirement planning solutions available.

Whether you're just starting your career or planning for retirement, the updated NPS 2025 offers features that can help you build a secure financial future.

How to Open an NPS Account and Select the Right Options

You can start your NPS journey on nps.pensionbazaar.com in less than a minute, with a fully digital and hassle-free account opening process. Opening an NPS account is simple and open to anyone between 18 and 85 years, including salaried employees, self-employed professionals, freelancers, and NRIs. All that’s required is basic KYC documentation, such as a government-issued ID and address proof. Your Permanent Retirement Account Number (PRAN) stays with you for life, allowing you to continue contributing seamlessly even if you change jobs, move cities, or relocate abroad.

Step 1: Choose Your Account Type

Tier I - Retirement-focused (Mandatory): Offers tax benefits and enforces long-term discipline. Partial withdrawals are allowed for specific life events such as education, marriage, illness, or buying/construction of a home.

Tier II – Flexible savings (Optional): Offers full liquidity with no tax benefits; ideal for short- or medium-term savings.

Step 2: Choose Your Pension Fund Manager (PFM)

Pick from 10 trusted Pension Fund Managers such as HDFC Pension Fund, ICICI Prudential Pension Fund, SBI Pension Fund, Aditya Birla Sun Life Pension Fund, Kotak Mahindra Pension Fund, Axis Pension Fund, LIC Pension Fund, DSP Pension Fund, Tata Pension Fund, or UTI Pension Fund. With the new Multiple Scheme option, you can invest across several fund managers while still tracking all your savings under a single Permanent Retirement Account Number (PRAN).

Step 3: Choose Your Investment Style

Auto Choice (Lifecycle Fund): A hands-free, age-based allocation that automatically adjusts your money mix between equity and debt as you grow older — taking higher risk when you’re young and becoming safer as you near retirement. Types of Auto Choice Funds

• Life Cycle 25(Low) - Equity exposure starts at 25% and tapers to around 5% by age 55
• Life Cycle 50(Moderate) -Equity exposure begins at 50% and reduces to 10% by 55
• Life Cycle 75(High) -Equity starts at 75% and gradually drops to 15% by 55
• Life Cycle Aggressive (formerly Balanced Life cycle Fund) Equity starts at 50% and gradually drops to 35% by 55

Active Choice: Gives full control over your equity, corporate bonds, government securities, and alternative asset allocation. Under 2025 reforms, you can now go up to 100% equity under MSF, giving experienced investors higher growth potential if they can tolerate short-term volatility. Annual rebalancing is still available, and now you can rebalance across schemes under the same PRAN

Multiple Scheme Framework(New) : MSF lets you invest in multiple pension schemes under a single PRAN, enabling better diversification across fund managers and strategies. With the 2025 reforms, MSF also allows up to 100% equity allocation under eligible schemes, maximising long-term growth potential for investors who can handle market volatility. You can seamlessly rebalance across schemes, whether you follow Auto or Active Choice, without opening a new account.

How Does NPS Work?

The National Pension System (NPS) is a government-regulated, long-term retirement framework designed to help you build a pension corpus in a systematic way. When you open an NPS account, you are assigned a Permanent Retirement Account Number (PRAN), which remains with you for life, even if you change jobs or locations.

You make regular contributions to your NPS account during your working years. These contributions are invested across equity, corporate debt, and government securities based on the investment choice you select, and are professionally managed by Pension Fund Managers (PFMs) appointed by the NPS regulator.

NPS follows a defined retirement structure. On retirement, a portion of the accumulated corpus can be withdrawn as a lump sum (up to 80%, with 60% being tax-free), while the remaining amount is mandatorily used to purchase an annuity. This annuity provides a steady monthly pension, ensuring a regular income after retirement.

By combining regulated fund management, flexible investment choices, and a structured payout at retirement, NPS offers a transparent and disciplined approach to building long-term retirement income.

Example :

• Contributing ₹5,000/month from age 30 can grow to ₹1.5 crore by age 60, thanks to your contributions and the returns they earn over 30 years.
• Doubling the contribution to ₹10,000/month but starting at age 40 results in a lower corpus of ₹92 lakh by age 60.

This demonstrates that starting early and investing consistently allows even small amounts to grow exponentially, as the returns themselves generate additional returns—a true snowball effect for your retirement wealth.

*Assuming 12% annualized returns. Figures are for illustration only; actual results may differ.

Asset Allocation Evolution

NPS offers two distinct ways to manage your investments — Auto Choice and Active Choice — giving you the freedom to decide how involved you want to be in managing your portfolio.

Auto Choice – Lifecycle Fund:

Auto Choice adjusts your portfolio automatically as you age, shifting from equity-heavy growth in your 30s to safer bonds and government securities by retirement, balancing growth with risk. There are four types of Lifecycle Funds based on your risk appetite like LC75 (High), LC50 (Moderate), LC25 (Conservative) & Balanced Life Cycle Fund.

For example, in the Balanced Lifecycle Fund (LC100), the allocation evolves with age — starting with 50% in equity, which gradually reduces to 35% by age 55, ensuring a smooth transition from growth to stability.

Active Choice – Manual Allocation:

Active Choice lets you control your allocations manually, maintaining higher equity or adjusting bonds as you see fit. This approach is ideal for those who want flexibility and can handle market swings. Under the 2025 reforms, your investment options gain more flexibility and growth potential, with Auto/Active Choice now compatible with multiple fund managers and Active Choice allowing up to 100% equity where suitable.

• Auto/Active Choice now works with MSF, allowing diversified allocation across multiple PFMs
• Active Choice can now leverage 100% equity for higher long-term growth, where suitable

Returns, Costs, and Tax Benefits

Returns (5-Year Annualised):

NPS is designed to deliver steady, market-linked growth over time. Equity-focused schemes have historically generated around.
14-16% per year, offering higher growth potential over the long term. Corporate bond schemes provide 6-7% annualised returns, balancing risk with moderate income, while government securities yield 5-6%, prioritising capital protection and stability. These returns reflect past performance and are linked to the performance of the underlying assets, highlighting the advantage of a diversified, professionally managed portfolio.

*Source NPS Trust. Returns as on 29th Oct’25.

Tax Benefits:

NPS remains one of the few retirement instruments offering triple tax benefits (EEE – Exempt-Exempt-Exempt), meaning your contributions, the growth of your investments, and a portion of your withdrawals are tax-efficient.

NPS vs Other Options

Comparing NPS with other retirement and investment options helps you make an informed decision about your retirement planning strategy.

Is NPS Right for You?

If you value discipline, diversification, and compounding, NPS offers one of the most cost-effective retirement solutions in India – now upgraded with flexibility, MSF, and higher growth potential through the 2025 reforms.

NPS has evolved from a rigid pension plan to a modern, modular, investor-friendly retirement solution. Start small, stay consistent, and let compounding and smart asset allocation secure your financial independence.

FAQs - quick answers

Can NRIs invest in NPS?  

Yes, non-resident Indians can open an NPS account by completing basic KYC and providing a PAN. The account remains portable even if you move across countries.

Can I switch Pension Fund Managers (PFMs)?  

Yes, you can change your PFM once a year to align with your risk appetite, investment style, or fund performance.

Can I have multiple NPS accounts?  

Under the new Multiple Scheme Framework (MSF), you can hold multiple schemes under the same Permanent Retirement Account Number (PRAN), enabling diversification across different fund managers and asset allocations.

What happens if I change jobs or cities?  

Your NPS account is fully portable, so contributions continue seamlessly regardless of job changes, relocations, or even moving abroad.

Are there limits on contributions?  

Tier I has minimum contributions to remain active, while Tier II is fully flexible. The reforms do not change contribution limits but enhance flexibility in withdrawals and investment options.