The National Pension System: Complete Notes

This note brings together the law and practice of the National Pension System: its statutory basis and features, the PRAN and the two tiers of account, investment choice and assured returns, contributions, portability and points of presence, exit and withdrawal after the 2025 reforms, the Multiple Scheme Framework, and the sectors through which people join, including NPS Vatsalya.

1. Statutory Basis and Features (Section 20)

Section 20(1) deems the contributory pension system notified on 22 December 2003 to be the NPS from 1 January 2004. Section 20(2) fixes its features: an individual pension account with withdrawals up to 25% of contributions; a CRA; choice of pension funds and schemes, including a 100% Government securities option and minimum assured return schemes; portability; points of presence; no implicit or explicit assurance except market-based guarantees; exit only as regulations provide; and compulsory annuity on exit. Section 20(3) adds an optional account with withdrawal at any time. The NPS is a defined contribution system with an unbundled architecture of CRA, pension funds, NPS Trust, Trustee Bank, custodian, points of presence and annuity providers.

2. PRAN and the Two Tiers

• PRAN: one lifelong, portable twelve-digit number per subscriber, allotted by a CRA.
• Tier I: the mandatory pension account: locked until exit, partial withdrawals up to 25% of own contributions, compulsory annuity, ₹500 at opening and ₹1,000 a year, with tax benefits.
• Tier II: the optional account: needs an active Tier I, withdrawal at any time, ₹1,000 at opening, no annual minimum, generally no deduction (a Tax Saver variant exists for Central Government employees). Transfers are allowed from Tier II to Tier I only.

3. Investment Choice

• Asset classes: E (equity), C (corporate debt), G (Government securities); Tier I Scheme A (alternatives) was merged into C and E in 2025.
• Active choice: the subscriber sets the allocation, with equity up to 75%.
• Auto choice: life cycle funds LC75, LC50 (the default), LC25 and BLC reduce equity with age.
• Changes: scheme preference four times and pension fund once a year. Central Government employees have had choice since 2019.
• Assured returns: contemplated by Section 20(2); an expert committee under M.S. Sahoo was set up in January 2026 to design assured payouts.

4. Contributions, Portability and Points of Presence

• Rates: Central Government 10% employee and 14% Government (from 1 April 2019), or 18.5% Government under the UPS; corporate as agreed; individuals voluntary.
• Flow: point of presence to Trustee Bank, matched by the CRA, invested by pension funds, held by the custodian.
• Points of presence (Section 22): registered under Section 27(3) to receive and transmit contributions and instructions, charging only within PFRDA's limits; eNPS allows online access.
• Portability: across employers, sectors, locations and intermediaries, with the same PRAN.

5. Exit, Withdrawal and Annuity

• Regulations: the Exit and Withdrawal Regulations, 2015, amended in December 2025.
• Normal exit, non-government: at 60, superannuation or after 15 years; at least 20% annuity and up to 80% lump sum or systematic withdrawal; whole corpus if up to ₹8 lakh; ₹6 lakh lump sum with the balance over at least six years if ₹8 to 12 lakh.
• Government subscribers: at least 40% annuity; up to 60% lump sum.
• Premature exit: at least 80% annuity, unless the corpus is ₹5 lakh or less.
• Flexibility: deferment and continuation to 85; up to four partial withdrawals before sixty; loans against up to 25% of own contributions.
• Death: whole corpus to the nominee or heirs; 20% interim relief for families of missing subscribers.
• Annuity: bought from an IRDAI-regulated life insurer empanelled as an annuity service provider; annuity income is taxable.

6. The Multiple Scheme Framework

From 1 October 2025, non-government subscribers may hold several schemes under one PRAN, designed by pension funds for groups such as corporate employees, professionals and gig workers. Each scheme has moderate and high-risk variants, with equity up to 100% in the high-risk variant, charges capped at 0.30% of AUM, and switching under the Section 20(2) framework only after fifteen years or at normal exit. The common schemes continue alongside it.

7. Sectors and NPS Vatsalya

• Central Government: mandatory for civilian recruits from 1 January 2004; CCS (Implementation of NPS) Rules, 2021; UPS option from 1 April 2025.
• States: join by notification under Section 12(4); all but West Bengal adopted the NPS, and some have announced a return to the Old Pension Scheme since 2022.
• All Citizen (from 1 May 2009, ages 18 to 70) and Corporate (from 2011) models.
• Unorganised sector: NPS Lite/Swavalamban (2010) and the Atal Pension Yojana (2015).
• NPS Vatsalya: for minors, launched 18 September 2024, revised guidelines January 2026: ₹250 minimum, partial withdrawal after three years for education, illness or disability, choices at 18 and 21, and exit with 80% lump sum or the whole corpus if ₹8 lakh or less.

8. Related Topics and Provisions

• Central recordkeeping agency, pension funds and the NPS Trust (Sections 21 and 23)
• Registration of intermediaries (Section 27)
• The Atal Pension Yojana and the Unified Pension Scheme
• Annuities and the role of IRDAI
• Taxation of the NPS