The National Pension System (NPS) was initiated by the government in 2004 for government employees. However, in 2009, the scheme was opened to all citizens. The NPS is a voluntary, long-term retirement scheme, regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. 

This article provides detailed information about the National Pension Scheme (NPS) for individuals preparing for the civil services exam.

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What is the National Pension Scheme?

The National Pension Scheme (NPS) is a retirement investment plan initiated by the Indian government. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

‘Features of NPS

Here are some key features of the NPS:

• NPS is a voluntary scheme that allows individuals to invest in a pension account for their retirement.
• NPS is open to employees from the public, private, and unorganized sectors, excluding armed forces personnel.
• Subscribers are encouraged to make regular contributions to their NPS account during their employment.
• After retirement, subscribers can withdraw a certain percentage of the accumulated corpus as a lump sum. The remaining amount is received as a monthly pension.

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Who can join NPS?

• Any Indian citizen between the ages of 18 and 65 can join NPS.
• Both salaried and self-employed individuals can participate in the scheme.
• NPS is also open to Non-Resident Indians (NRIs) on a voluntary basis.

Benefits of NPS

• The NPS offers higher returns than traditional instruments like the Public Provident Fund (PPF).
• It provides a variety of investment options to subscribers, who also have a say in where their funds are invested.
• The NPS reduces the government's retirement liabilities.
• If a subscriber has been investing for at least three years, he/she can withdraw up to 25% for certain purposes before retirement (age 60). This withdrawal can be done up to 3 times with a gap of at least 5 years between each withdrawal. These restrictions are only for tier I and not tier II accounts.
• The entire amount cannot be withdrawn by the account-holder upon retirement. As of April 2021, 60% can be withdrawn, which has now been made tax-free. The remaining 40% must be set aside so that the subscriber can receive a regular pension from an insurance company.

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Tax benefits 

• Individuals can avail tax deductions on their contributions to the NPS under Section 80CCD(1) of the Income Tax Act. This deduction is subject to a maximum of 10% of the individual's salary (Basic + DA) and an overall limit of Rs. 1.5 lakh.
• An additional tax deduction of up to Rs. 50,000 is available under Section 80CCD(1B) for contributions made towards NPS.

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Types of NPS Accounts

• Tier-I Account: This is a mandatory account that comes with certain restrictions on withdrawals. It is designed to provide retirement benefits.
• Tier-II Account: This is an optional account that offers more flexibility in terms of withdrawals. Subscribers can withdraw funds as per their requirements.

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Regulator and entities for NPS

• The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It ensures transparency and monitors the performance of fund managers.
• Central Recordkeeping Agency (CRA) maintains records and administers the NPS accounts.
• Pension Fund Managers (PFMs) are authorized entities that manage the investment of NPS funds as per the guidelines set by PFRDA.
• Points of Presence (POPs) are intermediaries that facilitate NPS account opening. They provide various services related to NPS to individuals.

We hope all your doubts regarding this topic have been addressed after going through this article. Ace your UPSC preparation with the Testbook App!