The NPS makeover: What’s changed and why it matters now

The Pension Fund Regulatory and Development Authority (PFRDA) has recently announced changes to the rules governing normal exit from NPS. Subscribers can now withdraw 100% of their accumulated pension wealth if the corpus is up to ₹8 lakh, and up to 80% as a lump sum (with the remaining 20% annuitized) if the corpus exceeds ₹12 lakh.

Crucially, the minimum lock-in period has been reduced to 15 years or until the subscriber attains the age of 60, whichever is earlier.

It has been an eventful year for NPS. Reforms include the introduction of the multiple scheme framework and the inclusion of gold and silver exchange-traded funds (ETFs) among investment options. NPS now offers flexibility to choose different fund managers across asset classes, the ability to switch schemes without triggering tax, access to new schemes with up to 100% equity exposure, a reduced mandatory annuitization of just 20%, and more favourable withdrawal rules for early retirement.

Even lump-sum withdrawals can be structured through a systematic withdrawal plan, ensuring regular monthly inflows. In effect, NPS now offers a comprehensive retirement solution—what remains is for individuals to adopt it.

Common pushbacks against NPS centre on inadequate savings, the need to prioritise short-term goals, the long-term lock-in, and an unconscious belief that individuals can generate better returns on their own.

Retirement security no longer commands the priority it once did. Two decades ago, it was carefully protected; today, the prevailing assumption seems to be that a good salary will suffice. Lifestyle expenses, often discretionary, have become perceived necessities, resulting in lower savings. Whatever savings remain are channelled towards immediate goals rather than retirement. In the pursuit of better education, housing or vacations, many individuals also overspend.

While competing priorities are often cited as barriers to retirement savings, this ultimately reflects a mindset issue. Retirement planning must remain a priority, not a trade-off, for financial well-being in later years. Rising job insecurity only magnifies the cost of neglecting retirement planning.

The case for NPS

NPS is a strong vehicle for building a retirement corpus, offering low costs, high equity allocation, a disciplined lock-in and tax deductions under both tax regimes.

While the employee provident fund (EPF) provides stability, most contributors cap their investments at the statutory limit, which restricts corpus growth. A 35-year-old with monthly expenses of ₹1 lakh would need a retirement corpus of about ₹10 crore by age 60, an outcome that is realistically achievable only through long-term equity investing.

A common argument against NPS is the lock-in, with investors preferring stocks or mutual funds for liquidity. Historically, the lock-in until age 60 deterred many. This has now been reduced to 15 years, and the change applies retrospectively—an important positive for those planning early retirement.

Moreover, lock-ins serve a purpose: they curb emotional and impulsive decisions and allow capital to compound over the long term. As in any endeavour, commitment and discipline over time drive outcomes, and the same principle underpins the NPS lock-in.

Another misconception is that NPS is a conservative instrument and that stocks or mutual funds necessarily deliver superior returns with greater flexibility. Equity exposure under NPS is restricted to the top 250 stocks. Any comparison of returns must therefore be like-for-like. Small-cap fund performance should not be benchmarked against NPS equity exposure; large- and mid-cap funds offer a more appropriate comparison.

Actively monitoring stocks and mutual funds amid a vast array of choices often leads to inaction or excessive churn. NPS removes this burden. Studies show that individual investors typically spend little time on research and make decisions based on recent price movements rather than fundamentals, resulting in underperformance relative to broader markets. While individual stocks can outperform, doing so consistently over long periods is rare without professional expertise. Active portfolio management is also time-consuming and may not suit everyone.

Although NPS now offers multiple schemes and asset classes under the expanded framework, keeping it simple, by sticking to the traditional common schemes with an active equity option, can be sufficient to build an adequate retirement corpus and secure a meaningful pension.

Retirement security is an urgent priority, and the NPS has been designed to deliver it.

Mrin Agarwal is a financial educator, founder of Finsafe India and co-founder at Womantra.