New NPS: More freedom, less annuity, bigger retirement role

Summary: NPS is emerging as a powerful retirement tool for salaried employees. With pre-tax employer contributions, ultra-low costs and reduced annuity requirements under the new rules, it allows higher capital deployment and better long-term compounding, making it far more relevant in retirement planning than before.

For years, the National Pension System (NPS) carried a reputation that kept many investors at arm’s length. It was rigid at exit, heavy on annuities and short on flexibility. In recent weeks, though, that perception deserves a rethink.

A series of changes, some already effective, have reshaped how NPS investors can invest, withdraw, and structure retirement income. The question now isn’t whether NPS has improved. It has. The real question is: how do these changes alter the way you should use it?

Reform 1: Less annuity, more freedom

The most significant reform is at the exit stage.

From December 16, 2025, the mandatory annuity requirement for private-sector NPS subscribers has been reduced from 40 per cent to 20 per cent. This single change materially alters how much of your retirement corpus you can access.

Here’s how exits now work based on corpus size:

• Up to Rs 8 lakh: You can withdraw 100 per cent as a lump sum, with no annuity requirement.
• Rs 8–12 lakh: You can withdraw Rs 6 lakh immediately, with the remaining amount paid via phased withdrawals (SWP-like) for at least six years.
• Above Rs 12 lakh: You can withdraw 80 per cent, while 20 per cent must still go into an annuity.

Reform 2: NPS’s answer to SWP

Another key improvement is the introduction of Systematic Unit Redemption (SUR), essentially NPS’s answer to the systematic withdrawal plans (SWPs) used in mutual funds.

Instead of choosing between a one-time lump sum and an annuity-heavy structure, retirees can now opt for phased, market-linked withdrawals, giving them:

• More predictable retirement cashflows
• Greater control over how and when money is withdrawn
• An alternative to locking large sums into annuities immediately

This brings NPS closer to how retirees already manage income from mutual fund portfolios.

Other reforms

Several operational changes quietly improve usability:

• Investment allowed till age 85, extending the accumulation phase well beyond earlier limit.
• Partial withdrawals increased from three to four, allowed once every four years, up to 25 per cent of the subscriber’s own contribution.
• Loans against NPS balances are now permitted.
• In case of a change in citizenship, subscribers can withdraw 100 per cent as a lump sum, with permanent account closure.
• For cases involving a missing person or presumed death, 20 per cent is paid immediately, and 80 per cent after FIR or court formalities, with the full amount released as a lump sum.

Earlier reform from October

Until now, NPS investors had two choices:

1. Auto Choice, where asset allocation shifts automatically with age
2. Active Choice, where investors decide their allocation across equity (E), corporate debt (C), and government securities (G)

On October 1, 2025, a third route was added: the Multiple Scheme Framework (MSF).

Active Choice vs MSF: What’s different?

Equity exposure

• Active choice (common schemes): Equity capped at 75 per cent
• MSF: Certain schemes can go up to 100 per cent equity in ‘high-risk’ variants

Who controls asset allocation?

• Active choice: The subscriber decides their equity (E), corporate debt (C), and government securities (G) allocation and can rebalance
• MSF: Allocation is determined by the scheme’s mandate. Here, the subscriber chooses the scheme, not the percentages

Fund manager flexibility

• Active choice: One pension fund manager (PFM) per asset class
• MSF: Multiple MSF schemes can be held, potentially across different PFMs

Costs

• Common schemes: Expense ratio capped at 0.09 per cent
• MSF schemes: Expense ratio capped at 0.30 per cent

Switching and lock-ins

• Active Choice: PFM can be changed once per financial year
• MSF: Switching within MSF is not permitted for 15 years. However, switching back to common schemes is allowed.

A key nuance: Only once the scheme crosses Rs 5 crore in AUM does the fund manager have to start aligning the portfolio with the model asset allocation disclosed in the factsheet. So, early investors in an MSF scheme should understand that:

• The portfolio may not look like the advertised allocation initially, and
• The scheme behaves more like a flexibly managed fund until it reaches a sufficient size.

Why corporate NPS can suit some investors

For those unaware, corporate NPS is simply the National Pension System offered through your employer instead of you investing in it entirely on your own.

In fact, now, the strongest case for NPS comes from Corporate NPS, especially for salaried investors in the highest tax bracket.

The argument rests on three pillars:

1. Pre-tax investing advantage

The biggest edge of Corporate NPS lies in pre-tax investing. When employer contributions are routed through NPS, the money gets invested before tax is deducted.

To see why this matters, consider a simple example. If Rs 10,000 is contributed to NPS via the pre-tax route, the entire Rs 10,000 is invested. In contrast, if the same salary is taken as cash and invested in an equity mutual fund after tax, only around Rs 6,900–7,000 is available for investment after roughly 31 per cent tax and cess.

In effect, NPS allows you to deploy around 40–45 per cent more capital for the same salary cost. Over long periods, this higher starting base can make a material difference to wealth creation.

2. Lower costs

Another structural advantage of NPS is its significantly lower cost. NPS fund management charges typically range between 0.03-0.09 per cent, while direct equity mutual funds usually charge anywhere between 0.5-1.2 per cent.

This difference may appear small on the surface, but over decades, lower costs mean more of your returns stay invested and compound in your favour.

3. Long-term compounding

An illustrative comparison over 30 years at 11 per cent annual returns shows this clearly. The projected corpus under NPS works out to around Rs 2.83 crore, compared with about Rs 1.98 crore for an equity mutual fund investment made post-tax.

Even after accounting for NPS exit rules, where 60 per cent of the corpus is tax-free, 20 per cent is taxable (with up to 80 per cent withdrawable) and the balance is used to purchase an annuity, the approximate post-tax realisable wealth still favours NPS. The NPS delivers around Rs 2.12 crore, along with a pension of roughly Rs 2.83 lakh per year, compared with about Rs 1.51 crore from mutual funds after applying 12.5 per cent long-term capital gains tax above Rs 1.25 lakh.

However, it’s worth noting that corporate NPS is not entirely commission-free. Up to 0.5 per cent commission on contributions, capped at Rs 25,000, applies.

What these changes really mean

Taken together, the 2025 reforms make NPS:

• Less rigid at exit
• More flexible in retirement income planning
• More competitive on equity exposure
• Still structurally different from mutual funds

But these improvements also introduce new decisions, especially around choosing between Active Choice and MSF, balancing higher equity with longer lock-ins, and understanding how employer contributions tilt the maths.

NPS hasn’t become simpler. It has become more powerful, but only if used with clarity.

For more such insights, keep reading Value Research.

Also read: NPS equity funds can now invest in gold, silver ETFs & IPOs

This article was originally published on December 19, 2025.