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How Has NPS Performed in Comparison with Other Instruments?

Diversification is very important when it comes to retirement planning. Know how has NPS performance in comparison with other retirement investments.

  • 5,554 Views | Updated on: Sep 25, 2023

The desire for a financially secure and comfortable post-retirement life is what makes you invest your money in schemes that will help protect these dreams. That corpus serves as a critical backbone for those golden years of your life. This also introduces you to a host of financial plans that are often surrounded by a calculated mix of expenditures and savings. With so many investment instruments around in the financial framework, choosing the one that can deliver maximum value for your money becomes challenging. While the National Pension System (NPS) is one of the most popular investment choices, there are various concerns and questions regarding it.

In this article, we will learn about the pros and cons of NPS and compare it to other investment options so that you can make an informed decision that caters to all your requirements.

The Basics of the National Pension Scheme

National Pension Scheme is a government-run social security programme. Except for military personnel, this pension scheme is available to all public, private, and unorganized employees. As part of the system, employees are urged to contribute to a pension fund at regular intervals throughout their employment. Contributors can withdraw a fixed amount of money from the account when they retire. If you have an NPS account, you will get the leftover money as a monthly allowance once you retire.

Advantages of NPS

Following are some of the most valued advantages of NPS:

  • Diversification is one of the essential NPS plan advantages as it allows you to engage in both the equity and debt markets with a single transaction.
  • Section 80CCE (Sub-section of Section 80C) of the Finance Bill 2011-12 allows for a tax deduction on contributions made by an employer to an employee’s national pension programme (NPS) account of up to 10% of basic pay and dearness allowance (DA).
  • You can now apply for NPS accounts online at the most accredited banks. To apply for NPS, you must submit a completed registration form, evidence of address, proof of identification, and certificate of birth.

Disadvantages of NPS

Below mentioned are some drawbacks of NPS:

  • There is some ambiguity regarding the withdrawal of taxes, which is why most users question, “Is NPS return guaranteed?”. Under current laws, about 60% of the corpus can be removed at maturity. In comparison, at least 40% must be utilized to purchase annuities and annuity insurance plan returns are currently not tax-free.
  • NPS portfolios are not allowed to contain more than 50% equity investment. For those in their 20s and early 30s, it means losing money since equity has demonstrated to provide 12-15% annual returns over extended periods of time.
  • You may modify your investment strategy between government securities, corporate bonds, and equities. However, the equity exposure is limited to a particular percentage. Many investors seeking better returns consider this a significant disadvantage of NPS.


Public Provident Fund (PPF) has a holding period option that offers a marketable interest rate and investment returns. Under the Income Tax Act, profits and returns are not taxable. The maturity duration of a PPF account is 15 years. The risks are low because PPF invests entirely in debt. Each quarter, the government sets the interest rate, which remains unchanged for that quarter. On the other hand, returns from NPS aren’t guaranteed and are subject to market factors.

Mutual Funds vs NPS

Mutual funds are a collection of many diverse investment options that create returns over a considerable length of time. AMCs engage experienced experts known as fund managers to meticulously handle clients’ funds and adjust allocations in response to market movements. Because of the flexibility (you have the option of withdrawing your funds) they provide, mutual funds are frequently used as emergency savings. As a result, it is recommended to invest in NPS if your objective is to retire with tax advantages and you have a low-risk appetite.


Equity Linked Savings Scheme (ELSS) is a form of diversified equity programme offered by mutual funds in India with a three-year lock-in period. Because ELSS is entirely equity-oriented, it is significantly riskier than NPS. The highest equity allotment in NPS is set at 75%, enabling you to invest in typically safe asset groups, such as corporate bonds and government securities.

The financial market brings numerous alternatives for you to choose from. Having understood the pros and cons of NPS, you can now make a prudent decision. Keep in mind that while choosing an investment opportunity, you must ensure that you choose one that aligns well with your needs and risk appetite. Only after conducting comprehensive research should you settle for an option!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors