The National Pension System: Statutory Basis and Basic Features (Section 20)

The National Pension System (NPS) is the centrepiece of the PFRDA Act. It began as an executive scheme for new Central Government employees in 2004 and has since become a voluntary, portable retirement savings system open to every citizen. Section 20 gives the NPS a statutory foundation: it deems the 2003 scheme to be the NPS, fixes its basic features in the Act itself, and provides an optional account from which the subscriber may withdraw at any time.

1. Deeming of the 2003 Scheme (Section 20(1))

• Retrospective continuity: every account opened and every contribution made since 1 January 2004 is treated as made under the statutory NPS. No re-enrolment was needed when the Act came into force on 1 February 2014.
• Defined contribution: the 2003 notification replaced the defined benefit Old Pension Scheme for new Central Government recruits (other than the armed forces) with a defined contribution system, in which the pension depends on what is contributed and how it is invested.
• Link to transfer provisions: together with Section 13, which vests the Interim PFRDA's assets, contracts and proceedings in the statutory Authority, Section 20(1) secures seamless continuity of the system.

2. The Basic Features (Section 20(2))

Section 20(2) lists the features the NPS must have. Because they are fixed by Parliament, the Authority cannot remove them by regulation; it can only work out their details. The features are:

1. Individual pension account: every subscriber has an individual pension account. The subscriber may make withdrawals from it, subject to regulations, of up to twenty-five per cent of his own contributions, not of the returns earned on them.
2. Central recordkeeping agency: a CRA keeps the records of all subscribers, and performs accounting and administration functions.
3. Choice of funds and schemes: the subscriber has a choice of multiple pension funds and multiple schemes. In particular, the subscriber may choose a scheme investing up to one hundred per cent in Government securities, and may choose minimum assured return schemes notified by the Authority.
4. Portability: the account is portable, so the subscriber can change jobs, employers or location without losing his savings.
5. Points of presence: contributions and instructions are collected through points of presence, which transmit them to the Trustee Bank or CRA.
6. No implicit guarantee: there is no implicit or explicit assurance of benefits except a market-based guarantee mechanism purchased by the subscriber.
7. Exit only as provided: the subscriber may not exit except as specified by regulations.
8. Annuity on exit: on exit, the subscriber must purchase an annuity from a life insurance company, in the proportion and manner specified by regulations.

3. The Optional Account (Section 20(3))

• Optional: a subscriber may, in addition to the pension account, have an optional account with the features of choice of funds, portability, points of presence and market-based guarantees.
• Withdrawal at any time: unlike the pension account, the subscriber may withdraw from the optional account at any time.
• Practice: in operation, the pension account is called the Tier I account and the optional account the Tier II account.

4. How the NPS Is Organised

• PFRDA: regulator and developer of the system.
• NPS Trust: holds the assets of the NPS for the benefit of subscribers and monitors the pension funds.
• Pension funds: invest contributions according to the subscriber's chosen scheme and the investment guidelines.
• Central recordkeeping agencies: maintain each subscriber's account under a Permanent Retirement Account Number (PRAN).
• Points of presence: banks and other entities that register subscribers and collect contributions, including online through eNPS.
• Trustee Bank: receives and transfers funds between points of presence, pension funds and annuity providers.
• Custodian: holds the securities bought by pension funds.
• Annuity service providers: life insurers, regulated by IRDAI, that provide the annuity on exit.

This unbundled architecture separates recordkeeping, fund management, custody and distribution. Each function is performed by a different registered intermediary, which reduces cost, increases competition and limits the damage if one entity fails.

5. Who Can Join

• Mandatory: new Central Government employees (except the armed forces) recruited on or after 1 January 2004, and employees of State Governments that have adopted the NPS for their new recruits.
• Voluntary: any citizen of India, including a non-resident, within the age limits specified by regulations (currently 18 to 70 years under the All Citizen model), and Overseas Citizens of India.
• Through employers: employees of companies and other organisations that adopt the Corporate model.
• Minors: through NPS Vatsalya, opened by a parent or guardian.

6. Amendment of NPS Features

The features in Section 20(2) can be changed only by Parliament. Within those features, details such as the percentage of corpus to be annuitised, the grounds for partial withdrawal and the age of exit are set by regulations under Section 52. This is why the major changes of 2025, such as reducing compulsory annuitisation for non-government subscribers to 20 per cent, could be made by amending the exit regulations without amending the Act.

7. Questions Arising

Is the NPS a defined benefit or a defined contribution scheme?

It is a defined contribution scheme. The pension depends on the contributions made and the returns earned. This is the most important difference from the Old Pension Scheme, under which the pension was a fixed proportion of the last salary drawn, paid by the Government. The Unified Pension Scheme, introduced for Central Government employees from 1 April 2025, adds an assured payout within the NPS framework for those who opt for it.

Can a regulation abolish the 25 per cent withdrawal limit?

No. The limit of twenty-five per cent of contributions is fixed by Section 20(2) itself. Regulations may impose conditions on withdrawals, such as the grounds and frequency, but may not allow partial withdrawals beyond the statutory limit.

8. Related Topics and Provisions

• PRAN and Tier I and Tier II accounts
• Investment choice and minimum assured return schemes
• Contributions, portability and points of presence (Section 22)
• Exit, withdrawal and annuity under the NPS
• Central recordkeeping agency (Section 21)
• Pension funds and the NPS Trust (Section 23)