NPS vs mutual funds: Need your retirement savings at 35? Check withdrawal rules, lock-in periods and tax benefits

Choosing between the National Pension System (NPS) and retirement-focused mutual funds involves more than comparing returns and tax benefits. For young investors, access to savings can become equally important as financial priorities change.

While NPS comes with restrictions on early withdrawals, retirement-focused mutual funds generally allow full redemption after their lock-in period. These differences can have significant implications for investors planning to buy a home, take a career break or meet other major expenses in their 30s.

Under the NPS All-Citizen Model, an investor exiting before completing 15 years and before reaching age 60 is generally considered to be making a premature exit.

Sumit Shukla, MD and CEO, Axis Pension Fund, explains that subscribers making a premature exit can withdraw up to 20% of their accumulated corpus, while at least 80% must be used to purchase an annuity. However, subscribers with a corpus of up to ₹ 5 lakh can withdraw the entire amount.

For instance, an investor who has accumulated ₹ 10 lakh in NPS over 10 years and needs the money at 35 can withdraw only ₹ 2 lakh immediately. The remaining ₹ 8 lakh must be used to purchase an annuity under the premature exit rules.

Prithvinath Reddy, Chief Executive Officer and Director, PPFAS Pension, says that under the applicable NPS framework, subscribers completing 15 years can withdraw their entire corpus if it does not exceed ₹ 8 lakh.

For a corpus between ₹ 8 lakh and ₹ 12 lakh, up to ₹ 6 lakh can be withdrawn immediately, while the balance can be withdrawn systematically over at least six years. For a corpus exceeding ₹ 12 lakh, up to 80% can be withdrawn as a lump sum, with at least 20% going towards an annuity, Reddy explains.

In contrast, retirement-focused mutual funds typically allow full redemption after the prescribed lock-in period.

"While this provides flexibility, it also places greater responsibility on investors to preserve those savings for retirement," Reddy says.

NPS allows partial withdrawals for specified financial needs, although restrictions apply.

According to Shukla, subscribers can withdraw up to 25% of their own contributions after completing three years. These withdrawals are permitted for purposes such as children's education or marriage, purchasing a house, medical treatment and certain other eligible financial obligations.

Shukla explains that up to four partial withdrawals are permitted before age 60, subject to the applicable conditions, including a four-year interval between withdrawals.

Importantly, the 25% limit applies to the subscriber's own contributions rather than the entire accumulated corpus, which also includes investment returns and any employer contributions.

Retirement-focused mutual funds, meanwhile, typically have a lock-in period of five years or until the stipulated retirement age, whichever is earlier.