NPS 2.0: What Really Changed and What It Means for You

Earlier this month, NPS 2.0 was announced. For years, we’ve appreciated NPS as a reliable way to plan retirement, a long-term, steady instrument that rewarded consistency. But with this new version, things have changed quite a bit. Some updates make it better, while others raise questions.

Let’s look at what’s actually different, what stays the same, and what’s still under discussion, and what we, at Finology, really think about it.

What’s New in NPS 2.0

The biggest change in NPS 2.0 is the Multiple Scheme Framework (MSF). Earlier, you could only invest through one scheme at a time. If your fund wasn’t doing well, you could switch, but you couldn’t invest in multiple options side by side. But now, you can.

Subscribers can invest in more than one scheme at the same time, just like mutual funds. This adds flexibility and removes the dependency on a single fund’s performance.

The second big update is around equity exposure. Earlier, NPS allowed a maximum of 75% equity allocation. Now, investors can go up to 100% equity exposure. This change is great for young investors who have a higher risk appetite and a long time before retirement.

But there’s also a catch. The expense ratio that pension fund managers can charge has increased from 0.03% to 0.30%. That means higher costs for investors. It’s still lower than most mutual funds, but it moves NPS closer to them in structure.

According to Pranjal, 

“This step makes NPS more flexible for investors, but also more profitable for fund managers, which is not always a good mix.”

So yes, NPS 2.0 brings freedom and flexibility, but also slightly higher costs.

What Stays Exactly the Same?

All the existing NPS schemes will continue as “Common Schemes.” Nothing changes there. These will still have the same structure and conditions as before; you can’t withdraw before age 60, and the equity cap remains the same.

The tax benefits also stay untouched. You still get deductions under Section 80C and 80CCD(1B), and at retirement, you still need to use 40% of the corpus to buy an annuity, while the rest can be withdrawn as a lump sum.

Think of it as two versions running parallel now, the Common Schemes (your familiar NPS 1.0) and the new MSF schemes (NPS 2.0). You can stick with the old model or explore the new, depending on what you prefer.

What’s Still Being Discussed

There are a few proposals that are still in discussion that some of which sound good on paper, but might not play out well in reality.

• Higher withdrawal limit: The limit for lump-sum withdrawal could go up from 60% to 80%. That means you’d only need to invest 20% in an annuity plan for a regular pension. But this could also backfire. If people withdraw too much at once, they could be left without a stable income later. Retirement funds are meant to protect you from your future self.
• Exit flexibility after 15 years: This would allow investors to exit after 15 years instead of waiting till 60. It adds freedom, yes, but also increases the temptation to cash out early.
• More partial withdrawals: The number of times you can withdraw partially might increase from 3 to 6 times. Again, more flexibility, but less discipline, and NPS was designed to be a disciplined product.

These are still under review, and if implemented, could change how NPS behaves in the long run.

Why the Expense Ratio Matters

One of the lesser-talked-about changes is the jump in the expense ratio, and this one needs a closer look.

Let’s take HDFC Pension Fund as an example. As of March 2025, it managed assets worth ₹1.15 lakh crore, making it the largest in the NPS ecosystem. But its profit in FY 2024–25 was only around ₹5.4 crore, which is less than 0.01% of assets. That’s very less. 

So, on paper, the higher expense ratio might look like a way to make these businesses sustainable. But for investors, it means higher costs eating into returns. The regulator seems to be walking a fine line here, trying to make the NPS business viable for fund managers while keeping it affordable for investors.

What We Really Think

If you’ve followed us for a while, you know we’ve always liked NPS for its simplicity. It wasn’t flashy, it wasn’t about short-term returns, it was about building wealth steadily over decades.

With NPS 2.0, that character is changing a little. The higher equity cap and multiple schemes make it more flexible, but they also make it behave more like a mutual fund, which isn’t necessarily a good thing.

As Pranjal summed it up, 

“NPS 2.0 feels like an inferior clone of mutual funds; it’s trying to be something it wasn’t meant to be.”

That said, not everything about this update is negative. The higher equity allocation is great for young investors, and the option to hold multiple schemes gives more room to plan. But the increase in expense ratios and early withdrawal options can dilute what made NPS special in the first place: discipline and low cost.

What You Should Do

If you already invest in NPS, don’t rush to switch. Continue with your existing Common Scheme; it still works under the old framework and gives you all the benefits without the added complexity.

The new MSF options might make sense for those who truly understand asset allocation and are comfortable managing multiple funds. But for most investors, sticking to the Common Schemes is still the smarter move.

It’s good for the ecosystem, not necessarily for everyone in it. For most long-term investors, the Common Schemes are still the best choice.

Wrapping Up

NPS 2.0 isn’t a bad move. It’s just a different one. It tries to modernise the system and make it more competitive, but in doing so, it risks losing the simplicity that made it special.

So, if you’re planning your retirement today, keep it straightforward. Use NPS as it was meant to be used for discipline, stability, and consistency. Let mutual funds handle flexibility and risk.

Because at the end of the day, retirement planning is about ensuring peace of mind when you no longer want to work for it.