NPS
The National Pension System (NPS) is a voluntary, market-linked retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA), offering subscribers the choice of investing across equity, corporate bonds, government securities, and alternative assets.
NPS was launched for central government employees in January 2004 to replace the defined-benefit pension system and was extended to all Indian citizens between 18 and 70 years of age in 2009. By 2024, NPS had accumulated a corpus exceeding Rs 11 lakh crore across approximately 7 crore subscribers, reflecting its growth from a niche government scheme to a mainstream retirement vehicle. The Pension Fund Regulatory and Development Authority (PFRDA) was established under the PFRDA Act, 2013 to regulate NPS and related pension funds.
Subscribers could choose between two tiers. Tier I was the mandatory pension account with restricted withdrawals — premature full withdrawal was not permitted before age 60 except under specific circumstances (terminal illness, housing, higher education, critical illness), and at maturity, at least 40 percent of the corpus had to be used to purchase an annuity from a PFRDA-empanelled insurance company. Tier II was a voluntary savings account with no withdrawal restrictions but without the tax benefits available on Tier I contributions, except for government employees who received a special deduction.
The investment choice mechanism distinguished NPS from EPF and PPF. Subscribers could opt for Active Choice, selecting their own allocation across four asset classes: Equity (E, maximum 75 percent), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A, maximum 5 percent). Alternatively, Auto Choice offered three lifecycle fund options — Aggressive, Moderate, and Conservative — which automatically reduced equity allocation as the subscriber aged. The equity component of NPS invested in index funds tracking Nifty 50 and Nifty Next 50 (and sometimes Sensex), keeping fund management costs low.
The tax architecture of NPS was layered and advantageous for those who maximised it. Employee contributions of up to 10 percent of salary were deductible under Section 80CCD(1) within the overall Rs 1.5 lakh 80C limit. An additional Rs 50,000 deduction was available under Section 80CCD(1B), exclusively for NPS, providing a total potential deduction of Rs 2 lakh per year. Employer contributions of up to 10 percent of salary (14 percent for government employees post 2019) were deductible under Section 80CCD(2) over and above the Rs 1.5 lakh limit, making NPS particularly attractive for corporate employees whose employers contributed generously.
The mandatory annuitisation requirement at exit was the most cited disadvantage of NPS relative to PPF. Annuity rates in India were generally low, and the annuity income was taxable, reducing the attractiveness of the accumulated corpus compared to the fully tax-free lump sum available from PPF. However, for high-income earners who benefited from the 80CCD(1B) and 80CCD(2) deductions while in the 30 percent tax bracket, the upfront tax savings often outweighed the exit tax disadvantage when assessed on a net present value basis.