Written by : Knowledge Centre Team

2026-08-07

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The primary purpose of the National Pension System (NPS) was to offer a better return on investment for long-term retirement funds. This government pension scheme, in the earlier avatar, was restricted to people working for government departments or public sector undertakings. The pension amount was defined as 50% of the last drawn salary- a model that placed a heavy fiscal burden on the government's annual budget.

By shifting away from this defined-benefit model, NPS eliminated this budgetary drain while opening retirement planning to all Indian citizens, including NRIs. It allows subscribers to capitalise on the country's multi-decade economic growth, with the flexibility to choose safe, fixed-income government securities if they wish to avoid equity market volatility.

Key Takeaways

NPS provides market-linked returns with long-term wealth accumulation benefits
The investment is flexible, allowing equity, debt, and government securities allocation
NPS ensures that accumulated contributions are returned through retirement benefits or nominee payouts, subject to applicable rules.
Tax benefits under various sections of the Income Tax Act enhance savings
Compared to other retirement options, NPS provides a balanced approach with risk-adjusted returns

Historical Returns on NPS

The return on investment in NPS depends on the fund’s performance. A scheme’s market performance is a strong indicator of the average return possible from NPS, and the earlier you start investing, the more time your retirement corpus has to compound.

Broadly, here's how each asset class has historically performed over the long term:

Scheme	What it invests in	Typical long-term return range*
E (Equity)	Listed equity and equity-related instruments	Higher, but more volatile, historically in the low-to-mid double digits over long horizons
C (Corporate Debt)	High-rated corporate bonds and debentures	Moderate and comparatively steadier
G (Government Securities)	Central and state government bonds	Lower but more stable, moving with interest-rate cycles

*Returns are market-linked and vary by pension fund manager, time period, and market conditions. For exact, up-to-date CAGR figures, check the NPS Trust returns page, which updates its scheme-wise return data weekly.

Note: NPS previously also offered Scheme A (Alternative Investments), covering instruments like REITs, InvITs, and venture capital funds. This scheme was discontinued by NPS Trust with effect from January 16, 2026, so new NPS allocations are now limited to Schemes E, C, and G.

You must stay invested for the long run if you want inflation-beating returns. Investing in equity will help you generate wealth faster.

How NPS Returns Work: Contribution-Based, Not Outcome-Based:

The new NPS opened up the opportunity of earning a pension to everyone irrespective of their profession and employment. The scheme now focused on contribution instead of fixating on outcome. This change meant that the cap on earning a pension was now removed. The amount you would receive as a pension post-retirement solely depended on the money you invested.

The returns from NPS depend on the performance of your funds in the market. However, you may choose the allocation depending on your risk appetite:

Scheme E (Equity) allows up to 75% allocation to equity
Scheme C (Corporate Debt) which invests up to 100% in corporate bonds
Scheme G (Government/Gilt Bonds) focuses only on government bonds and allows up to 100% allocation

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Understand the NPS Schemes

You may like to know the intricacies of various NPS schemes before selecting one for investing your money. This is where you decide the asset class allocation, the ratio in which your contributions get invested across equity, corporate debt, and government securities.

Since October 2025, PFRDA's Multiple Scheme Framework (MSF) has expanded these choices further. Under MSF, non-government NPS subscribers can hold multiple schemes across fund managers, each available in a moderate-risk or high-risk variant. The high-risk variant can now go up to 100% equity allocation, a first for NPS. The original E, C, and G schemes continue to exist and are now referred to as "common schemes," and it's these that most subscribers are still invested in. Each Pension fund manager has a bouquet of fund schemes that you may select from.

Corporate CG Scheme:

For corporates investing in pension funds, PFRDA has launched a new scheme called the Corporate Central Government Scheme (Corporate-CG scheme). The new scheme brings parity in fund management charges.

Companies can invest in NPS by choosing either the private sector NPS or government NPS. Both the saving schemes are similar in architecture but differ in investment patterns.

Scheme E (Tier 1): Invests primarily in equity market instruments. The maximum permissible investment is 50% of the total contribution.
Scheme C (Tier 1): Invests in corporate debt and related instruments, allowing up to 100% in corporate bonds.
Scheme G (Tier 1): Invests predominantly in government Securities and "low risk, low return" fixed income instruments, with up to 100% allocation permitted.

Investment Choices for NPS

The first is a standard auto-choice option and is useful if you find it difficult to decide on your investments yourself. The second is an active choice option if you want to plan your investments on your own.

Active Choice: In active choice, you can design your financial portfolio and allocate funds from the available three asset classes. You may decide how much to invest and select the pension fund manager (PFM) and scheme, as well as the percentage allocation.
Auto Choice: If financial portfolio management is not something you know or are interested in, NPS gives you the flexibility to opt for a dynamic and automatic allocation of your money based on your age.

Your money will be invested in asset classes in proportions that shift with your age. As you age, exposure to equity and corporate debt gradually decreases while increasing in government securities, a built-in way of reducing risk as you approach retirement.

Did You Know?

PFRDA's Multiple Scheme Framework, launched on October 1, 2025, crossed ₹145 crore AUM and 1.5 lakh accounts in four months

Source: PFRDA

Benefits of NPS Investment

If you are exploring investments to save on tax, the National Pension System (NPS) is a good avenue. Besides tax benefits, NPS also aids in growing your wealth and building a retirement kitty.

Some of the other benefits associated with NPS:

You are free to choose where to invest
Qualified and reputed pension fund managers (PFMs) manage your money
You may fix/define your monthly contributions
Manage your account from anywhere
Your employer(s) can contribute to your NPS account
You can increase regular investments as your income grows
Maximum tax benefit of up to ₹2 lakhs under Section 123 (formerly Section 80C) and Section 124 (formerly Section 80CCD(1B)) of the Income Tax Act, 2025
Enjoy market-linked growth for your portfolio over a few decades
Disciplined withdrawals as the account stays locked in until you reach 60 years of age
You can withdraw in emergencies and for important life goals like a child’s higher education or home purchase

Click Here - NPS Withdrawal

NPS vs Other Retirement Investment Options

Though the advantages of NPS render it a desirable retirement investment vehicle, it is essential to compare it with other investments:

Employee Provident Fund (EPF): Offers fixed returns with tax-exempt interest and withdrawal. Nevertheless, the returns are usually less than the market-linked growth opportunity of NPS.
Public Provident Fund (PPF): A safe investment option with tax advantages, but the lock-in period is higher and lacks the flexibility of NPS.
Mutual Funds: Provide high returns but involve high market risk and lack the formal pension benefits of NPS.
Unit Linked Insurance Plans (ULIPs): Offer both insurance and investment benefits but tend to have higher charges than NPS.

A key benefit of NPS over these alternatives is its scope for building a bigger corpus through disciplined contributions. Further, the refund of NPS ensures that the contribution made by the investor is not lost, which makes it an even safer bet for building long-term wealth.

What is an NPS Refund?

Here's what an NPS refund means: unlike some financial products where your money can be forfeited if you exit early or pass away, NPS guarantees a return of contributions in every scenario:

On retirement (60 years): You can withdraw up to 60% of your corpus as a lump sum, with the remaining 40% used to purchase an annuity for regular pension income
On premature exit: After completing the minimum tenure in the scheme, a portion of your corpus can be withdrawn, with the rest annuitised
On death of the subscriber: 100% of the accumulated corpus is paid out to your nominee or legal heir; none of it is forfeited.

So, if you were in search of NPS refunds meaning, this is it: it's not a "refund" in the tax sense, but a structural guarantee that the money you've put into your NPS pension plan always comes back to you or your family, whether through retirement withdrawals, an annuity, or a payout to your nominee.

What is the Best Alternative to NPS?

Although with its features well suited for retirement goals, NPS has few rivals. Unit Linked Insurance Plans or ULIPs from life insurers can compare neck to neck when it comes to long-term investments, and are worth evaluating as a complementary or alternative retirement tool.

Many ULIP plans today offer features well suited to retirement goals, such as:

Tax-free partial withdrawals after five years of investment
A total annual investment of up to ₹2.5 lakhs offers tax-free growth
Life cover adds to your family’s financial safety
Invest up to 99 years of age, i.e., build corpus until 60-65 years and then withdraw tax-free amount till 99
Invest in a mix of diversified equity and debt portfolios
Automatically manage the portfolio with given strategies
Bonus additions for investors who stay invested over the long term

NPS should be one of the several investment assets that you should invest your money in. Diversification is critical for reaching long-term financial goals with minimal risk. Diversification reduces risk by allocating funds across different financial instruments and investment classes.

Adding investments like ULIP provides you with adequate diversification while maintaining long-term growth. A diversified portfolio opens up more opportunities, reduces stress, and gives sustainable returns.

Conclusion

The National Pension System provides a regulated, structured means of planning for retirement to be financially secure in later years. NPS's advantages of flexible investment alternatives, tax advantages, and market-linked growth make it a suitable candidate in retirement planning. The scheme's return-of-contribution structure also adds to the safety of your investments, enabling contributors to plan for the future with confidence. But as with any investment, diversification becomes imperative. By complementing NPS with other investments such as ULIPs or mutual funds, you can build a well-rounded, sustainable retirement strategy.

Glossary

CAGR: Compound Annual Growth Rate is a measure of investment growth over time, representing the mean annual return rate
Gilt Bonds: Government-issued securities that are considered low-risk and provide fixed returns
Lock-in Period: The duration for which an investment remains inaccessible for withdrawal
Pension Fund Manager (PFM): A regulated entity responsible for managing the investments made under NPS
Annuity: A regular income paid out at set intervals, purchased using a portion of your NPS corpus at retirement

FAQs

Since NPS means investing in a market-linked pension scheme, your returns depend mainly on your asset allocation (equity, corporate debt, government securities), the performance of your chosen pension fund manager, and how long you stay invested.

You can choose between Active Choice, where you decide your own allocation across Scheme E (equity), Scheme C (corporate debt), and Scheme G (government securities), or Auto Choice, where allocation shifts automatically based on your age.

Yes, partial withdrawals of up to 25% of your own contributions are allowed after completing a minimum tenure in the scheme, for specific purposes like higher education, marriage, medical treatment, or buying a home.

On reaching 60, you can withdraw up to 60% of your corpus as a tax-free lump sum, while the remaining 40% must be used to purchase an annuity that pays you a regular pension.

NPS returns aren't taxed while your money stays invested; at withdrawal, up to 60% of the lump sum is tax-free, while the annuity portion is tax-free at purchase, but the pension income you later receive from it is taxed as per your income slab.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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NPS Returns: Meaning and Benefits of NPS Returns

Introducing BSE 500 Enhanced Value 50 Fund with Promise4Wealth

Key Takeaways

Historical Returns on NPS

How NPS Returns Work: Contribution-Based, Not Outcome-Based:

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Understand the NPS Schemes

Corporate CG Scheme:

Investment Choices for NPS

Did You Know?

Benefits of NPS Investment

NPS vs Other Retirement Investment Options

What is an NPS Refund?

What is the Best Alternative to NPS?

Conclusion

Glossary

FAQs

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