National Pension System (NPS)

What is the National Pension System (NPS)?

The National Pension System (NPS) is a voluntary, defined-contribution pension scheme introduced by the Government of India on January 1, 2004. It replaced the Old Pension Scheme (OPS) for all new Central Government employees (except Armed Forces). NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is now mandatory for government employees while remaining open to all Indian citizens.

Under NPS, both employees and the government contribute regularly to build a retirement corpus. The accumulated fund is invested in equity, corporate bonds, and government securities by PFRDA-regulated Pension Fund Managers.

In April 2025, the government introduced the Unified Pension Scheme (UPS) as an optional alternative for Central Government employees, offering assured monthly pension benefits.

NPS Contribution Rules

Employee Contribution

Every government employee must contribute 10% of Basic Pay + Dearness Allowance (DA) every month to their NPS Tier-I account. This contribution is mandatory and automatically deducted from the monthly salary.

Government Contribution

From April 1, 2019, the Central Government increased its matching contribution from 10% to 14% of Basic Pay + DA. This applies to all serving Central Government employees under NPS.

Total Monthly Contribution

• Employee: 10% of (Basic Pay + DA)
• Government: 14% of (Basic Pay + DA)
• Total: 24% of (Basic Pay + DA) goes into the pension fund monthly.

Pension Benefits Under NPS

NPS is a market-linked pension scheme. Your final pension depends on the total accumulated corpus at retirement and the annuity plan you choose.

At Retirement (Superannuation at 60 years)

• 60% of the accumulated corpus can be withdrawn as a lump sum (tax-free).
• 40% must be used to purchase an annuity from a PFRDA-registered insurance company to receive monthly pension.

Premature Exit (Before 60 years)

• 80% must be invested in an annuity.
• 20% can be withdrawn as lump sum.

Death or Disability

In case of death or permanent disability during service, the subscriber or nominee is entitled to the entire corpus and benefits as per Old Pension Scheme rules (if applicable).

NPS Withdrawal Rules

NPS offers limited withdrawal options during service:

• Partial Withdrawal: Allowed for specific needs such as children's higher education, marriage, or critical illness (conditions apply).
• Maximum 25% of employee's contribution can be withdrawn (up to 3 times during the entire tenure).
• Minimum 3 years of account operation required before partial withdrawal.

The full corpus becomes accessible only at retirement, as per the 60-40 rule mentioned above.

NPS vs Unified Pension Scheme (UPS)

In April 2025, the government introduced the Unified Pension Scheme (UPS), giving employees a choice between NPS and UPS.

Key Differences

Employees had until September 30, 2025, to opt for UPS. UPS is designed to provide stability and guaranteed income, especially for long-serving employees.