The National Pension System, or NPS, is the contributory pension scheme that applies to every Central Government employee recruited on or after 1 January 2004. It replaced the Old Pension Scheme (OPS) for new entrants. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and operates under the PFRDA Act, 2013. This article covers how the scheme works for a serving Central Government employee — the Tier I structure, contribution rates, fund choices, withdrawal rules at exit, and a worked corpus projection.
Quick reference
| Item | Position |
|---|---|
| Applicability | All Central Government employees joining on or after 1 January 2004 (except Armed Forces) |
| Employee contribution (Tier I) | 10% of basic + DA |
| Government contribution (Tier I) | 14% of basic + DA (revised from 10% by Cabinet decision dated 31 January 2019) |
| Tier II | Voluntary, withdrawable, no Government contribution |
| Vesting age | 60 years (date of superannuation) |
| Mandatory annuity at exit | 40% of corpus (60 years), 80% (premature exit) |
| Tax benefit on contribution | Section 80CCD(1), 80CCD(1B), 80CCD(2) |
| Regulator | PFRDA |
Tier I and Tier II
Tier I (mandatory)
Tier I is the core retirement account. Contributions are locked in until 60 years of age. The employee contributes 10% of basic + DA every month; the Government contributes 14% on the same base. The Tier I account follows the employee through every transfer, posting, and (since 2019) movement to a State Government, autonomous body, or PSU governed by PFRDA. It cannot be withdrawn during service except in narrowly defined emergency situations.
Tier II (optional)
Tier II is a voluntary savings account linked to the Tier I PRAN. Contributions are entirely from the employee; the Government does not contribute. Funds can be withdrawn at any time. Tax benefits are limited (no automatic 80C deduction, except a special three-year-lock-in window introduced in 2019 for Central Government employees). Tier II is optional; many employees never open one.
Contribution and salary slip
The 10% employee share is deducted at source from salary every month. The 14% Government share is credited to the same account through PFMS. Both go to the same PRAN (Permanent Retirement Account Number) — a unique 12-digit number that is the employee’s identifier in NPS for life.
Worked example, Level 7
- Basic pay: Rs. 44,900
- DA at 60%: Rs. 26,940
- Basic + DA: Rs. 71,840
- Employee share at 10%: Rs. 7,184 per month
- Government share at 14%: Rs. 10,058 per month
- Total monthly contribution: Rs. 17,242
Investment choice
For Central Government employees, three investment patterns are now permitted (since the OM dated 31 January 2019):
- Default (Conservative). 85% Government securities, 15% equity and corporate bonds. The legacy default.
- Scheme G (Government Securities). 100% G-Sec — lowest risk, lowest expected return.
- Scheme LC-25 (Life Cycle 25). Maximum 25% in equity, age-graded reduction.
- Scheme LC-50 (Life Cycle 50). Maximum 50% in equity, age-graded reduction.
The choice can be exercised once per financial year through the NPS portal or the nodal officer. Choice of pension fund manager (HDFC PFM, ICICI Prudential PFM, LIC PFM, SBI PFM, UTI Retirement Solutions, Aditya Birla Sun Life PFM, Tata PFM, Max Life PFM) is also available with annual switch facility.
Exit and withdrawal
At superannuation (60 years)
- Up to 60% of the corpus can be withdrawn as a lump sum, fully tax-free under section 10(12A).
- The remaining 40% must be used to purchase an annuity from an empanelled life insurer. Annuity income is taxable as per the slab.
- If the corpus is below Rs. 5 lakh at exit, full lump-sum withdrawal is permitted (no annuity mandate).
Premature exit (resignation, voluntary retirement before 60)
- 20% lump sum, 80% mandatory annuity.
- If corpus is below Rs. 2.5 lakh, full lump-sum withdrawal is permitted.
Death during service
Following the OM dated 30 March 2021, the family of a deceased NPS subscriber Central Government employee has the option to (a) take family pension under the existing CCS (Pension) Rules, with the corpus going back to the Government, or (b) withdraw the corpus per NPS rules. Most families choose option (a) for the lifetime family pension. The family pension here is computed on the same basis as for OPS employees (30% normal rate, 50% enhanced rate for the first 7 years or up to age 67, whichever is earlier).
Partial withdrawal during service
Up to 25% of the employee’s own contribution (not the Government contribution) can be withdrawn for specified purposes:
- Higher education of children.
- Marriage of children.
- Purchase or construction of a residential house (first such property).
- Treatment of specified critical illnesses for self, spouse, children, dependent parents.
- Skill development or self-development specified courses.
- Establishing own venture or start-up.
A maximum of three partial withdrawals are permitted in entire service, each separated by a five-year gap (the gap requirement is relaxed for the critical-illness category).
Tax treatment
- Section 80CCD(1): Employee contribution up to 10% of basic + DA, capped at Rs. 1.5 lakh (under section 80C overall limit).
- Section 80CCD(1B): Additional Rs. 50,000 deduction for employee’s own NPS contribution, over and above 80C.
- Section 80CCD(2): Government’s 14% contribution is fully deductible without any limit (different treatment from private-sector employer 10% cap). This is a significant tax advantage of NPS for Central Government employees.
- Lump sum withdrawal at 60: 60% portion is tax-free under section 10(12A).
- Annuity income: Taxable as per slab in the year of receipt.
Worked corpus projection
Assume an employee at Level 7 entry pay Rs. 44,900, age 30 at joining, retiring at 60 (30 years of contribution). Assumed annual increment growth: 3% in basic pay. Assumed average annual return: 9% (a long-run reasonable assumption for a balanced LC-25 portfolio).
- Year 1 monthly contribution (employee + Government): Rs. 17,242.
- Year 30 monthly contribution (after 3% annual increment growth and DA cycles): approximately Rs. 41,800.
- Total contribution over 30 years (employee + Government, undiscounted): approximately Rs. 1.06 crore.
- Corpus at retirement, compounded at 9% p.a.: approximately Rs. 3.85 crore.
- 60% lump-sum withdrawal: Rs. 2.31 crore (tax-free).
- 40% annuity corpus: Rs. 1.54 crore.
- Annuity at, say, 6.5% p.a. (current market rate range): approximately Rs. 1 lakh per month, taxable.
These are illustrative numbers, not promises. Actual returns vary by fund manager, scheme choice, and market conditions. Verify your projection through the NPS calculator at npscra.nsdl.co.in or your CRA portal.
Frequently asked questions
Can I switch from NPS to OPS?
Generally no, except for narrowly defined cases where the employee was selected against a vacancy advertised before 1 January 2004 and joined later (per various OMs and judgments). The Unified Pension Scheme (UPS) is now the structured alternative for those wanting a guaranteed pension.
What is UPS and should I switch?
UPS, notified in 2024, gives a one-time option to NPS subscribers to receive a guaranteed pension based on a defined formula. Whether to switch depends on years of service, corpus, and risk preference. See our separate detailed UPS article.
What if I resign and join the private sector?
Your NPS account stays with you under the same PRAN. New employer can continue contributing under their own NPS arrangement. At 60, the same exit rules apply. You can also continue contributing voluntarily under the All-Citizen Model.
Sources
- PFRDA Act, 2013, and Regulations under it.
- Department of Financial Services (DFS) OM dated 31 January 2019 (Government share raised to 14%).
- DoPPW OM No. 38/41/06-P&PW(A), dated 30 March 2021 (Family pension option for NPS subscribers).
- Income Tax Act, 1961, sections 80CCD, 10(12A).
- NPS architecture: https://npscra.nsdl.co.in.