1. Core Concept & Regulation
- Definition: National Pension System is a voluntary, defined contribution retirement savings scheme.
- Regulator: Pension Fund Regulatory and Development Authority (PFRDA), established under the PFRDA Act, 2013 (Statutory body).
- History: Launched in Jan 2004 for new Central Government recruits (except Armed Forces).
- Opened to all citizens (voluntary) in 2009.
2. Eligibility Criteria
- Age: 18 to 70 years (can be extended to 75).
- Citizenship: Open to Resident Indians, Non-Resident Indians (NRIs), and Overseas Citizens of India (OCI).
- Exclusions: Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible.
- PRAN: Each subscriber gets a unique Permanent Retirement Account Number.
3. Operational Structure: Tier-I vs. Tier-II
NPS operates via two distinct, linked accounts: Tier-I (mandatory, tax-saving retirement account, locked until age 60) and Tier-II (voluntary, flexible savings account, no tax benefits for most)
| Feature | Tier-I (Mandatory) | Tier-II (Voluntary) |
| Purpose | Retirement Saving | Short-term Saving |
| Withdrawal | Restricted (Lock-in till 60) | Unrestricted (Flexible) |
| Tax Benefit | Available (Sec 80C, 80CCD) | Generally None* |
| Eligibility | Open to all | Must have a Tier-I account first |
4. Investment Choices
Subscribers can choose their asset allocation via two modes:
- Active Choice: Subscriber decides the mix of Equity (E), Corporate Bonds (C), and Government Securities (G). Equity cap is 75%.
- Auto Choice: Investment mix changes automatically based on the subscriber’s age (Life cycle fund).
5. Withdrawal & Exit Rules
- At Maturity (Age 60):Lump Sum: Up to 60% of the corpus can be withdrawn (completely tax-free).
- Annuity: Remaining 40% must be used to buy an annuity (regular pension).
- Full Withdrawal: Allowed if total corpus is ₹5 Lakh (₹8 Lakh for some government categories in 2025).
- Partial Withdrawal: Allowed after 3 years of membership.
- Max 25% of own contribution only.
- Allowed max 4 times (updated from 3) for specific reasons like education, marriage, or medical emergencies.
6. Recent Policy Shift: Unified Pension Scheme (UPS)
- Context: Effective April 1, 2025, the government introduced UPS as an option for Central Government employees.
- The Difference: While NPS is market-linked, UPS provides an assured pension (50% of last 12 months’ average basic pay).
- Flexibility: Existing NPS subscribers (post-2004) can choose to switch to UPS.
Comparison: NPS vs. UPS
| Feature | National Pension System (NPS) | Unified Pension Scheme (UPS) |
| Nature of Scheme | Defined Contribution: Benefit depends on market returns. | Defined Benefit: Benefit is fixed and guaranteed by the Govt. |
| Pension Amount | Variable; based on the corpus accumulated and market performance. | Guaranteed: 50% of the average basic pay of the last 12 months. |
| Eligibility | All citizens (Govt & Private). | Currently for Central Govt employees (States can opt-in). |
| Minimum Service | No strict minimum for some payout; varies by tier. | 25 years for full pension; 10 years for minimum ₹10,000/month. |
| Employee Contribution | 10% of Basic Pay + DA. | 10% of Basic Pay + DA (Remains unchanged). |
| Govt Contribution | 14% of Basic Pay + DA. | 18.5% of Basic Pay + DA (Increased by Govt). |
| Inflation Protection | No direct link to inflation. | Dearness Relief (DR) provided based on All India Consumer Price Index. |
| Family Pension | Based on the annuity purchased from the corpus. | Guaranteed: 60% of the employee’s pension after their demise. |
Q. With reference to the 'National Pension System (NPS)', consider the following statements:
I. It is mandatory for all Central Government employees, including the Armed Forces.
II. Overseas Citizens of India (OCI) are eligible to join the scheme.
III. The lump sum withdrawal of 60% at maturity is completely exempt from income tax.
Which of the statements given above is/are correct?
(a) I and II only
(b) II and III only
(c) III only
(d) I, II and III
Answer: (b)
Explanation:
Statement 1: Incorrect
NPS is mandatory for all Central Government recruits who joined after January 1, 2004, but it specifically excludes the Armed Forces.
Statement 2: Correct
As per the 2019/20 PFRDA guidelines, OCI card holders are eligible to open and contribute to an NPS account.
Statement 3: Correct
Upon reaching age 60, a subscriber can withdraw up to 60% of the total corpus as a lump sum, and this entire amount is exempt from income tax.
