NPS gets a new edge over mutual funds: Why the old ‘pension product’ tag may no longer fit

So, has NPS finally become a serious alternative to mutual funds for long-term wealth creation?

The answer is not a straightforward yes or no. NPS has certainly become more flexible and attractive. But it is still designed for a very specific purpose – retirement.

The CIO of PPFAS Pension Fund Managers Pvt. Ltd. frames it as a matter of role rather than competition. Mutual funds are built primarily for wealth creation, insurance retirement plans combine protection with savings, and NPS is designed specifically to help investors build a retirement corpus and convert it into lifelong retirement income.

That distinction is important. The question is not whether NPS will replace mutual funds. The bigger question is whether the changes in NPS have made it good enough to deserve a much larger place in the long-term investment portfolio of Indian investors.

NPS is no longer the same retirement product

A lot has changed in NPS in recent years.

The Multiple Scheme Framework (MSF), which became effective for non-government subscribers from October 1, 2025, has given investors more choice. Under the framework, an investor can hold multiple schemes under one PRAN. Each scheme can have a different pension fund manager, asset allocation, NAV and risk
profile. The high-risk variant can have up to 100% equity exposure, compared with the earlier 75% ceiling.

That change matters for younger investors.

A 30-year-old investing for another 25 to 30 years can now take a much more equity-oriented approach within NPS. This brings the product closer to the way investors typically think about mutual funds for long-term wealth creation.

The PPFAS Pension presentation points out that equity allocations in NPS have delivered around 10% to 13% CAGR since inception, depending on the scheme and pension fund manager. It also highlights the very low fund management cost of NPS, at around 0.04% to 0.12% a year.

The presentation’s data on returns as of July 20, 2026 also shows that the equity schemes across pension fund managers have delivered double-digit returns in many cases. Tier I equity returns shown in the presentation range from 8.46% to 13.95% across the pension fund managers listed.

This does not mean NPS will always beat mutual funds. It does show that the old perception of NPS as a low-return, conservative retirement product is increasingly outdated.

The biggest NPS advantage may not be returns

The real advantage of NPS is not necessarily that it can generate higher returns than mutual funds.

Its bigger advantage can come from the combination of tax efficiency, low cost and disciplined retirement investing.

The PPFAS Pension presentation describes NPS as one of the few tax-saving products that continues to have relevance under the new tax regime. It also highlights the tax benefit available on 60% of the corpus at exit.

For salaried employees, the employer contribution route is particularly important.

Under Section 80CCD(2), employer contributions to NPS can be deducted from taxable income. The presentation says the limit is up to 14% of Basic plus DA under the new tax regime. Self-contribution deductions under Sections 80CCD(1) and 80CCD(1B) are not available under the new regime.

This means an employee should not always look at NPS and mutual funds as two products competing for the same rupee.

If the employer is contributing to NPS, the comparison changes because the employee may be able to get a tax benefit on money that would otherwise form part of taxable salary.

A Rs 17,500 monthly example shows why the comparison is different

The PPFAS Pension presentation has an illustration that makes this point clearly.

It compares a corporate NPS investment with a mutual fund SIP for an employee who can set aside Rs 17,500 a month.

In the NPS case, the Rs 17,500 is contributed before tax through the employer under Section 80CCD(2). In the mutual fund example, the same salary amount becomes Rs 12,040 after a 31.2% tax deduction.

Assuming a 12% annual return and a 7% annual increase in contributions, the presentation calculates a corpus of ₹5.17 crore through NPS against ₹3.56 crore through the mutual fund route.

It then shows a possible monthly income of about Rs 2.63 lakh from the NPS corpus, compared with about Rs 1.78 lakh from the mutual fund example.

But this illustration needs to be understood correctly.

It does not mean NPS investments will earn 48% more than mutual funds. Both are assumed to earn the same 12% return in the accumulation phase. The difference comes largely from the amount that can be invested after taking the tax benefit into account and the tax treatment at withdrawal.

The presentation itself says this is an illustration and not a guarantee of returns.

That is why the tax advantage can be particularly relevant for salaried investors who have access to corporate NPS.

NPS is becoming more flexible too

Another criticism of NPS has traditionally been its restrictions around withdrawals. That has also changed.

For retail subscribers with a corpus above Rs 12 lakh, the current exit framework allows up to 80% to be taken as a lump sum, with at least 20% used to purchase an annuity. The lump sum withdrawal and annuity purchase can also be deferred up to age 85.

There are also systematic withdrawal options.

Under Systematic Lump Sum Withdrawal, or SLW, an investor can take a fixed amount at regular intervals. Under Systematic Unit Redemption, or SUR, a fixed number of units are redeemed. The amount received can therefore vary with the NAV under SUR.

The important point is that the remaining money stays invested instead of being withdrawn all at once.

This is a significant change in the way investors can think about NPS. Instead of seeing retirement as a point where Instead of seeing retirement as a point where the entire investment is broken into a lump sum and an annuity, the investor can now think about the retirement corpus as money that can continue to remain invested while generating periodic withdrawals.

But NPS is still not a mutual fund

This is where investors need to be careful.

Mutual funds are primarily wealth-creation vehicles. Investors can use them for retirement, but they can also use them for almost any other long-term goal.

NPS has a much narrower purpose. It is built specifically for retirement and is designed to encourage investors to stay invested for the long term.

“NPS should be viewed as complementing rather than competing with other long-term investment products,” the CIO says.

That distinction makes sense for a typical investor. Someone in their 30s may need money for several goals over the next 20 years. A house, children’s education, financial independence or an early retirement may all require a flexible investment vehicle.

Mutual funds can play that role. NPS, meanwhile, can be the retirement bucket that an investor deliberately keeps separate.

That advantage compounds over a long investment horizon too, alongside daily NAV disclosure, online access and regular portfolio disclosures.

The bigger change is happening after retirement

This may be the most important part of the NPS story.

For decades, retirement planning in India was largely about one question: how big should my retirement corpus be? That question still matters, but a person retiring at 60 today may need that money to last another 20 to 30 years, not the decade or so that earlier generations planned for.

That longer horizon creates a different problem. The investor has to decide how much to withdraw every month, account for inflation, and make sure the money does not run out too early, all while not keeping the entire corpus in low-return investments for decades after retirement.

The CIO of PPFAS Pension Fund Managers says this shift is already underway.

“Yes, this is a real shift. Retirement planning in India is gradually moving beyond just building a large retirement corpus. With people living longer and spending 20 to 30 years post retirement, it is equally important to ensure a steady and reliable income throughout this period.”

This is where NPS has an advantage over a typical mutual fund portfolio. A mutual fund investor can set up a systematic withdrawal plan, but the responsibility for deciding how much to withdraw, how long the money should last and how the portfolio should be structured stays with the investor. NPS is being designed around this problem.

“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. This is exactly why PFRDA raised the age up to which one can stay invested in NPS to 85 years,” the CIO says.

Retirement, in other words, is no longer necessarily the point where growth stops and the portfolio shifts entirely into low-risk assets.

The PPFAS Pension presentation’s Retirement Income Scheme, or RIS, takes this further. PFRDA approved the RIS and drawdown framework through a circular issued on May 15, 2026, though the facility will go live only once the regulator notifies an implementation date. It is designed specifically for the payout phase and would allow the drawdown corpus to remain invested up to age 85. Under the proposed RIS structure, equity allocation starts at 35% at age 60, falls to 25% at 65, 15% at 70 and 10% at 75, with the 10% allocation continuing thereafter. The remaining allocation moves towards corporate bonds and government securities.

The idea is simple: a retiree still needs some growth, but also needs increasing stability as age rises.

“Retirees need to design for a much longer retirement horizon, balancing growth (so savings don’t lose value to inflation over 25+ years) with safety (so retirees don’t run out of money),” the CIO explains.

From corpus building to income planning

This changes the way people should think about retirement savings.

A Rs 3 crore corpus may look huge today. But the number alone does not tell you whether it will be enough.

What matters is how much income it can generate, how fast expenses rise and how long the money has to last.

The PPFAS Pension presentation also highlights this through its retirement income framework. Its RIS design offers different ways to draw money, including a systematic payout rate and systematic unit redemption. Under the systematic payout rate option, the payout is linked to the number of years left in the selected period. Under SUR, a fixed number of units is redeemed and the rupee payout changes with the NAV.

The older SLW and SUR routes also allow investors to take money monthly, quarterly or annually while the balance continues to remain invested.

This is an important change in retirement thinking, one the CIO sums up directly.

“Building a retirement corpus is only one part of the retirement journey. The bigger challenge is ensuring that the savings provide a regular income post retirement without getting exhausted too early,” the CIO says. “A large corpus feels reassuring, but without a plan to draw it down sensibly, retirees risk spending too fast and running out of money.”

Why 30 to 45-year-olds need to pay attention

This shift matters most for people who are still decades away from retirement.

A 35-year-old may feel that retirement is too far away to worry about. But that is exactly when retirement planning can benefit most from compounding.

The PPFAS Pension expert says people in this age group continue to underestimate three major risks.

“Many people in the 30–45 age group underestimate how long they are likely to live after retirement and the impact of inflation on their future expenses.”

The second problem is delaying the start of retirement planning. A person who starts investing at 30 has much more time to allow returns to compound than someone who starts at 40 or 45.

The third problem can be the opposite one. Some investors become too conservative too early. Someone who has 25 years before retirement does not necessarily need to invest like someone who is retiring next year.

“People in 30-45 age group also tend to delay retirement planning, assuming they have plenty of time, which means missing out on the benefits of long-term compounding,” the CIO says.

The increased equity flexibility within NPS, discussed earlier, is relevant here. But equity exposure should still be based on an investor’s time horizon and risk tolerance. A higher equity allocation also means accepting market volatility.

NPS can offer the discipline many retirement portfolios lack

There is another advantage that is easy to overlook: retirement savings need discipline.

A mutual fund investor can stop a SIP, redeem units or use the money for another goal. That flexibility is useful, but it can also make it easier to dip into retirement savings. NPS creates a stronger separation between retirement money and money meant for other goals.

The product also allows voluntary top-ups and investments across equity and debt, with the money remaining invested and compounding until withdrawal.

There are provisions for partial withdrawal too. After three years, subscribers can withdraw up to 25% of their own contributions for specified purposes such as education, illness, disability and purchase of a first home, subject to applicable conditions. The presentation says such partial withdrawals are tax-free.

So NPS is no longer as rigid as its older image suggests, though it is still not as liquid as a mutual fund. That is not necessarily a weakness; it is part of what makes it a retirement product.

So, should investors choose NPS over mutual funds?

For most investors, the better answer may be NPS plus mutual funds, rather than NPS versus mutual funds.

NPS can make particular sense when the objective is retirement and the investor has a long investment horizon. It can be especially attractive for salaried employees whose employers offer NPS contributions, since the tax treatment of employer contributions can make the effective investment amount higher than what an employee could invest from post-tax income.

Mutual funds still have an important role. They offer greater liquidity and a much wider range of investment choices. They can be used for goals that may arise before retirement, and they can help investors build a separate pool of wealth that is not locked into a retirement framework.

This is why the CIO’s argument that NPS should complement rather than compete with mutual funds is important.

“NPS continues to offer a disciplined and low-cost solution with a long-term perspective.”

The final test for NPS is not whether it beats mutual funds

NPS has clearly moved closer to the territory traditionally occupied by mutual funds.

It has more equity flexibility. It has multiple schemes and fund manager choices. It has very low costs. Its tax advantages can be significant, particularly for salaried employees using the employer contribution route. The latest withdrawal options also give investors more flexibility around retirement.

But its biggest differentiator is not simply the possibility of earning equity-linked returns. It is what happens after the wealth has been created.

A mutual fund can help an investor build a large corpus. The investor then has to decide how to convert that corpus into retirement income. NPS is increasingly trying to address both sides of the equation.

“Recent initiatives by PFRDA, including the upcoming Retirement Income Scheme (RIS) and more flexible exit options, reflect this shift towards helping retirees convert their savings into a predictable and sustainable income stream,” the CIO says. “The goalpost should move from ‘how much did I save?’ to ‘how long will my income last, and will it keep pace with rising costs?’”

That may ultimately be the strongest argument for NPS. It does not have to replace mutual funds.

For a person building long-term wealth, mutual funds can remain an important part of the portfolio. But for the money that is specifically meant to fund life after the salary stops, NPS is becoming a much more serious contender.

The real question for investors, therefore, is no longer simply NPS or mutual funds? It is how much of your retirement portfolio should be built through NPS, how much should sit in mutual funds, and how will you turn the combined corpus into an income that can last for the rest of your life?

Source note: NPS data, features, illustrations and retirement-income structures in this story are based on the PPFAS Pension Fund Managers presentation provided for this story. Regulatory references have been cross-checked against PFRDA’s published material. The return and corpus examples are illustrations and should not be treated as guaranteed returns.

Disclaimer: This article is for informational and educational purposes only and should not be construed as investment, financial, tax or retirement-planning advice. The discussion on NPS features, tax benefits, withdrawal rules, equity exposure and retirement-income options is based on the PPFAS Pension Fund Managers presentation provided for this article and the expert inputs shared with Financial Express. NPS rules, tax provisions, withdrawal conditions and regulatory frameworks may change from time to time. Readers should verify the latest provisions with PFRDA, NPS Trust, the Income Tax Department or other relevant official sources before making any investment or withdrawal decision.

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