By Rajesh Khandagale
India's National Pension System (NPS) has emerged as a cornerstone of retirement planning since its introduction for government employees in 2004 and subsequent expansion to all citizens in 2009. As the Indian workforce increasingly faces retirement security challenges, the NPS has evolved to become more flexible, accessible, and attractive to investors.
As of March 2025, the system has achieved significant milestones, with asset under management (AUM) reaching almost Rs 14 lakh crore and over 1.65 crore subscribers across the government and private sector. The private sector has 66 lakhs subscribers and this year alone added 12 lakh new accounts. This growth reflects both increasing acceptance and the persistent need for structured retirement planning in a country where informal employment remains prevalent.
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Recent regulatory changes have substantially improved the NPS's appeal for various investor profiles. The employer contribution tax deduction limit has increased from 10 per cent to 14 per cent of an employee's wages, providing significant tax benefits. The system permits tax-free withdrawal of up to 60 per cent of the corpus as a lump sum at retirement, with the remaining 40 per cent directed toward an annuity plan. Taxes apply only during the annuity payment phase, not upon withdrawal. This structure attempts to balance immediate financial needs with long-term income security.
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Investment flexibility has also increased, with subscribers able to maintain equity exposure at up to 75 per cent, allowing for potentially higher returns during working years. For Tier-II NPS accounts, the equity allocation cap has been increased to 100 per cent, providing even greater growth potential for those willing to accept additional risk. The Balance Life Cycle Fund automatically rebalances assets based on age and risk tolerance, with equity exposure up to 50 per cent for those under 45, gradually transitioning to more conservative allocations over time.
These changes reflect a growing recognition that retirement portfolios benefit from diversification and higher-growth assets during accumulation phases.
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The NPS has introduced several innovative features addressing specific subscriber needs. The Direct Remittance (D-Remit) facility provides same-day NAV for investments made before 11.00 am, potentially enhancing returns through timing advantages. The auto-debit option encourages disciplined, regular contributions—a cornerstone of successful retirement planning.
Between ages 60 and 75, subscribers can withdraw up to 60 per cent of their corpus periodically through Systematic Lumpsum Withdrawals (SLW), extending the investment horizon while providing flexibility for post-retirement financial management.
Family-focused options have expanded with NPS Vatsalya, allowing parents to start retirement planning for children under 18, with an additional Rs 50,000 tax deduction under Section 80CCD(1B).
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The NPS has embraced digital transformation to improve accessibility and user experience. E-KYC procedures have simplified account opening, reducing paperwork and eliminating in-person visits. Complete online account management, dedicated mobile applications, and UPI integration have made the system more accessible and aligned with India's broader digital payment ecosystem.
Despite these improvements, potential subscribers should consider several critical factors. The lengthy lock-in period necessitates an investment discipline as it limits liquidity compared to alternative investment options. First-time investors should seek financial guidance as the multiple schemes, tiers, allocation options and withdrawal options can be overwhelming to comprehend.
The NPS continues to evolve, walking a fine line between offering flexibility to attract subscribers and maintaining its core purpose of providing retirement security. Recent changes suggest a trend toward greater subscriber convenience, technological integration, and diverse investment options. For working individuals considering their retirement planning options, the NPS represents a structured, tax-efficient vehicle with growing flexibility. However, it functions best as part of a diversified investment strategy, than a standalone solution.
As retirement needs continue to evolve in India's dynamic economy, NPS appears positioned to remain a significant component of the pension landscape. Its ability to adapt to meet the changing needs of an increasingly diverse workforce while maintaining its fundamental commitment to long-term retirement security will determine its continued relevance and success.
The author is the senior vice president, NPS, KFin Technologies.
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Outlook Media Group and/or its employees. The article is for information purposes only; please consult your financial planner/s before investing.)
