When it comes to investing in India, we often think of mutual fund SIPs — an easy, flexible and reliable option for long-term wealth growth. In comparison, NPS, or the National Pension System, has always been considered pension-centric, a bit rigid, and less attractive. People usually looked at NPS as a product that would save some tax for them and create a decent retirement corpus. But it was never seen as a product that would challenge mutual funds.
But three major changes to NPS in 2025 have changed this entire perception. NPS is no longer just a tax-saving cum retirement plan; it is rapidly becoming a tool that rivals mutual funds in terms of cost, equity exposure and flexibility. Here are three new features that make NPS attractive for even those who want to generate wealth through it rather than saving on taxes.
1. 100% equity exposure in NPS
As you know, NPS offers two accounts – Tier 1 and Tier 2, catering to different financial needs. The functioning and tax treatment of both these accounts are totally different.
Tier 1 is your main pension account, with equity exposure limited to 75%. Tax benefits are also available here, but withdrawal rules are strict — 60% of the corpus is tax-free upon retirement, and 40% is mandatory as an annuity, the income of which is taxable.
But the story changes in Tier 2. Tier 2 is a completely flexible account — no lock-in, no withdrawal restrictions, and most importantly, it offers 100% equity exposure.
This means that you can now build a pure equity portfolio like a mutual fund in NPS. Liquidity is similar to that of an MF. You can redeem at any time but the cost is much lower than an MF.
This change puts NPS directly in line with equity mutual funds.
2. Ultra-low cost structure
Low costs are the biggest bonus for compounding over the long term. Mutual funds (especially regular plans) charge 0.5% to 1.5%, while NPS’s fund management cost is only around 0.03% to 0.09% (varies fund to fund and also plans). Transparent regulatory policies of 2025 have further strengthened this low-cost advantage.
This difference in long-term investing can provide a significant corpus advantage. This is where NPS, especially Tier 2 can outperform MFs in net returns, even when gross returns are similar.
For many, this is perhaps the first time they realise that NPS has become not just cheaper but a significantly more cost-efficient wealth creation tool.
3. Withdrawal rules now simpler
People’s biggest fear of NPS was that “money gets stuck.” This was the reason many young investors stayed away from it. But in 2025, withdrawal rules have not only been simplified but also made practical, understanding people’s needs.
In Tier 1, 60% of the money is tax-free after retirement. Partial withdrawals are also allowed, for everything from children’s higher education to medical emergencies and home purchases. The process is now digital and friction-free.
Tier 2 had no lock-in anyway but 100% equity + easy liquidity has made it a direct alternative to mutual funds.
NPS no longer carries that rigid, government scheme image. It has evolved into a modern, flexible, and long-term-friendly investment platform.
Does NPS really challenge mutual funds now?
Before 2025, the answer would have been ‘no’.
Today, the answer is ‘largely yes’.
Mutual funds are still a strong option due to their liquidity and tax treatment. But NPS is just as powerful, and in many ways, has improved, on three fronts:
-100% equity exposure (Tier 2) — now offers MF-like growth potential
-Ultra-low cost — which accelerates compounding
-Flexible withdrawals — making NPS no longer a “locked product”.