Refund of the NPS Corpus to States and Centre-State Issues

When States decided to return to the Old Pension Scheme, they faced a practical problem: their employees' NPS accounts held large sums built up from employee and State contributions and investment returns. The States sought the return of these sums; the Centre and PFRDA declined. The dispute raises questions of federalism, property rights and the structure of the PFRDA Act.

1. How States Joined the NPS

State subject: the pensions of State employees are a matter for the States, which decide the conditions of service of their own employees.
Section 12(4): the PFRDA Act applies to State Government employees only if the State extends the NPS to them by notification. Almost all States did so, from various dates after 2004.
Agreements: States entered into arrangements with the NPS intermediaries, such as the CRA and the NPS Trust, to operate their employees' accounts.
Contributions: employees and the State contributed to individual accounts, invested by pension funds and held by the NPS Trust.

2. The States' Claim

Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh informed PFRDA that they were reverting to the OPS and sought the refund of the accumulated corpus, at least the State's own contributions and returns, so that the money could support the OPS liabilities they were taking on. They argued that the money was contributed by the State and its employees for pensions, that pensions are a State subject, and that the State was now providing a pension by other means.

3. The Centre's Position

No provision for refund: the Ministry of Finance has stated in Parliament, including in February 2023 and December 2025, that there is no provision in the PFRDA Act, 2013 or the PFRDA (Exits and Withdrawals under the NPS) Regulations, 2015 for refunding the accumulated corpus, consisting of employee and Government contributions and accruals, to a State Government.
Belongs to subscribers: the corpus is held in individual pension accounts of the employees, who are the subscribers. It is not a pool of State money.
Exit rules: under Section 20(2), a subscriber may exit only as provided by the exit regulations, which provide for payment to the subscriber or nominee, not to the employer.

4. Legal Analysis

Individual accounts: Section 20(2) requires an individual pension account for each subscriber. Once credited, the State's contribution becomes part of the employee's account, and the employer has no residual claim under the Act.
Property of subscribers: the accumulated savings are the subscriber's property, protected by Article 300A. Transferring them to the State without the subscriber's consent and without authority of law would be difficult to justify.
Trust structure: the assets are held by the NPS Trust for subscribers, not for the employer.
Withdrawing from the Act: a State may cease to make contributions for new or existing employees, but the Act and regulations do not provide a mechanism for unwinding accounts already built up.
Possible routes: a State could seek a solution through agreement with the Centre, a legislative amendment, or employees' voluntary choices within the exit rules. A dispute between a State and the Union could, in principle, be brought to the Supreme Court under Article 131.

⚠ Note

The employee's own contributions present a different question from the State's. An employee who leaves the NPS on returning to the OPS still owns his own account, but can withdraw from it only as the exit regulations allow. Any arrangement under which employees hand over their NPS benefits to the State in exchange for OPS benefits depends on what they can lawfully withdraw.

5. Federal Dimensions

Competing interests: the State's power over its employees' service conditions sits against a Central law and a Central regulator holding the funds.
Fiscal federalism: the Centre has an interest in States' long-term fiscal sustainability, partly through its role in borrowing limits; the States assert their autonomy over expenditure choices.
Cooperative solutions: the UPS offered States a template they could adopt for their own employees, and some States announced that they would do so, as an alternative to full reversion.

6. Questions Arising

Can a State stop deducting NPS contributions from its employees?

Yes, as a matter of service conditions, a State can decide that its employees will be under the OPS and stop contributions. But the accounts already built up remain under the PFRDA Act and its exit rules.

Could Parliament authorise a refund?

Parliament could amend the Act to provide for transfer of accounts with the subscriber's consent, for example into a State pension fund. A compulsory transfer of subscribers' savings would raise questions under Articles 14 and 300A.

⚠ Key point

State employees are under the PFRDA Act only if the State extends the NPS by notification under Section 12(4). Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh, on returning to the OPS, sought refund of the accumulated corpus. The Centre has stated in Parliament (February 2023, December 2025) that the PFRDA Act and 2015 exit regulations contain no provision for refund to States. The corpus sits in individual pension accounts (Section 20(2)), is held by the NPS Trust for subscribers, and is the subscribers' property (Article 300A). Exit is only to the subscriber or nominee. Resolution lies in agreement, amendment or Article 131 proceedings.

7. Related Topics and Provisions

Extent and application of the Act (Section 12)
Old Pension Scheme and NPS: the debate
The National Pension System (Section 20)
Pension funds and the NPS Trust (Section 23)
Pension as a right: the constitutional framework