The National Pension System is a defined contribution pension scheme that allows individuals to build a retirement corpus through regular contributions during their working years. After retirement, this corpus is used to generate a steady income. Subscription is voluntary for most citizens, though it became mandatory for Central Government employees joining service on or after 1st January 2004 (with the exception of the armed forces). Most State Governments have since adopted it for their own employees as well.
Features
NPS is regulated by PFRDA, which was set up under the PFRDA Act, 2013. Any Indian citizen — resident, non-resident, or overseas — can subscribe voluntarily. It is widely considered one of the lowest-cost pension schemes available. Subscribers can choose their Point of Presence, Central Recordkeeping Agency, Pension Fund, and asset allocation, and can change these choices later. The account is portable across employers and locations, comes with tax incentives under the Income Tax Act, 1961, and offers market-linked returns based on the subscriber's investment choice. Account details can be accessed online at any time.
Structure and Intermediaries
NPS operates on an unbundled architecture — each intermediary (PoP, Pension Fund, CRA, Trustee Bank, Annuity Service Provider, Custodian, Retirement Advisors, and NPS Trust) handles only its assigned function. No single intermediary controls the entire system. This structure keeps intermediation costs low and protects subscribers' interests.
Sectors Covered
NPS covers four sectors: Central Government, State Government, Corporate, and All Citizen. The Corporate Sector covers employers and employees outside government who adopt NPS as part of their retirement benefit offering. An employer can run NPS alongside other retirement schemes, and contributions can come from the employer, the employee, or both, in any proportion. There is no mandate requiring the employer to contribute.
Employer Adoption
An employer can adopt NPS for its employees in one of two ways. The first is to register directly with PFRDA as a Point of Presence under the PFRDA (Points of Presence) Regulations, 2018, and facilitate NPS-related activities in-house. The second, and more common, option is to register with a CRA through an existing registered PoP, and use the PoP's services for employee registration, contribution uploads, withdrawals, and grievance handling.
Entities eligible to register under the Corporate Sector model include companies under the Companies Act 2013, cooperative societies, bodies established by parliamentary or state legislation, public sector enterprises, registered partnership firms, LLPs, proprietary concerns, trusts and societies, and foreign companies or diplomatic missions operating in India in respect of their eligible Indian employees.
Existing Superannuation Funds
Approved Superannuation Funds can be transferred to NPS — either in bulk or case by case. PFRDA has issued circulars on this in March 2017, June 2018, and January 2019.
Investment Distribution
The employer can select a Pension Fund from those registered with PFRDA and decide on asset allocation — active or auto — on behalf of employees, or can allow employees to make these choices individually. If the employer makes the choices, employees can revise them after one year (applicable to corporate NPS adoptions on or after 14th November 2018). No separate trust needs to be created by the employer; NPS's own architecture handles all underlying activity.
Charges
NPS charges are levied by each intermediary for services rendered. A PoP charges between Rs. 200 and Rs. 400 for subscriber registration (negotiable within the slab), 0.5% of the contribution amount for initial and subsequent contributions (minimum Rs. 30, maximum Rs. 25,000), Rs. 30 per non-financial transaction, and 0.125% of corpus for withdrawal processing (minimum Rs. 125, maximum Rs. 500). These are collected upfront. CRA charges — for account opening, annual maintenance, and per-transaction fees — are recovered through unit cancellation. Pension Fund investment Distribution fees range from 0.0467% to 0.09% and are adjusted in the scheme NAV. NPS Trust and custodian charges are also NAV-adjusted and are minimal. Tier-I charges can be borne by the employer or employee, at the employer's discretion; Tier-II charges are always borne by the subscriber.
Tax Benefits
For employees, contributions to Tier-I are deductible under Section 80CCD(1) up to 10% of basic salary plus DA (or 20% of gross income for the self-employed), within the overall Rs. 1.5 lakh ceiling under Section 80CCE. An additional Rs. 50,000 deduction is available under Section 80CCD(1B). Employer contributions are deductible under Section 80CCD(2), subject to an aggregate limit of Rs. 7.5 lakh across NPS, recognised provident fund, and approved superannuation fund. Employers can also claim their NPS contributions as a business expense under Section 36(1)(iv)(a) of the IT Act.
At exit, up to 60% of the corpus received as lumpsum is tax-exempt under Section 10(12A). The amount used to purchase an annuity (minimum 40%) is not treated as income under Section 80CCD(5). Partial withdrawals are also tax-exempt under Section 10(12B). GST (currently 1.8%) does not apply to annuity purchases made through NPS on exit. Tier-II accounts carry no tax benefits on contributions or gains.
Account Types
Every NPS subscriber has a Permanent Retirement Account Number (PRAN) — a unique identifier that stays with the subscriber regardless of employer or location. Under this, there are two accounts. Tier-I is the primary pension account with tax benefits and restricted withdrawals. Tier-II is an optional investment account that requires an active Tier-I, allows unrestricted withdrawals, and carries no tax benefits. NRIs and OCIs are not eligible for Tier-II.
Tier-I requires a minimum contribution of Rs. 500 at account opening and Rs. 1,000 per year. Tier-II requires a minimum opening contribution of Rs. 1,000 and a minimum subsequent contribution of Rs. 250.
Documents Required
Resident individuals need a recent photograph, PAN card, proof of address, and bank account proof. NRIs additionally need their Indian passport, while OCIs need their OCI card along with foreign address proof and NRE/NRO bank account proof.
Withdrawals
Three types of withdrawals are allowed. Partial withdrawal is available after three years of NPS membership, up to 25% of the subscriber's own contributions, for specific reasons: higher education or marriage of children, purchase or construction of a residential property, treatment of specified illnesses, disability above 75%, skill development, or setting up a business. This can be done a maximum of three times over the entire tenure.
Premature withdrawal is allowed after five years. At least 80% of the corpus must be used to purchase an annuity; the remaining 20% can be taken as lumpsum. If the total corpus is below Rs. 2.5 lakh, the entire amount can be withdrawn as lumpsum.
Normal withdrawal at age 60 allows the subscriber to take up to 60% as lumpsum (tax-exempt) and use the remaining minimum 40% for annuity purchase. If the corpus is below Rs. 5 lakh, full lumpsum withdrawal is permitted. Subscribers also have the option to continue in NPS up to age 75, defer the lumpsum or annuity purchase, or withdraw the lumpsum in installments. At 75, the account must be mandatorily closed.
Employers cannot forfeit NPS contributions when an employee resigns, except in government entities where service rules specifically allow withholding of employer contributions if a pecuniary loss to the employer is established through departmental or judicial proceedings. Loans or advances against NPS are not available.
Annuity Options
On exit, the portion of corpus used for annuity must be placed with an Annuity Service Provider empanelled with PFRDA. Available plans include life annuity (flat rate), annuity for a fixed term and then for life, annuity with 3% annual increase, joint annuity with 50% or 100% payable to spouse on death, annuity with return of purchase price, and a combination of joint annuity with return of purchase price. The pension amount will vary by plan and provider. A comparison tool is available on the NSDL CRA website.
Changes and Grievances
Subscribers can change their Pension Fund once per financial year and their investment choice up to four times per year — either online via account login or offline through the PoP. Changes to name, address, bank details, and nomination require a physical Form S2 with supporting documents submitted to the PoP or employer.
Grievances must be resolved by the concerned intermediary within 30 days. If unresolved, they can be escalated through the Central Grievance Distribution System (CGMS) available via the subscriber's NPS account login.
Best regards,
Written By Samyak Naik
