The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. It is a social security initiative by the Central Government of India, which encourages people to invest in a pension account at regular intervals during the course of their employment. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. The NPS is based on a unique Permanent Retirement Account Number (PRAN) which is allotted to every subscriber.
The NPS has two primary account types: Tier I and Tier II. The former is the default account while the latter is a voluntary addition. Under the NPS, an individual can contribute to his retirement account, and his employer can also contribute to the welfare and social security of the individual. The subscriber can opt for the default scheme, where his portfolio is rebalanced each year for the proportion of equity, corporate bonds, and government. Alternatively, the subscriber can choose to opt for the active choice, where he can decide the percentage of his contribution to be invested in different asset classes.
Opening an NPS account is now possible in less than half an hour, and it can be done online by linking the account to PAN, Aadhaar, and mobile number. The two account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The withdrawals from the tier I account are as per the rules/regulations, while withdrawals from the tier II account are permitted. The NPS is tax-efficient under Section 80CCC and Section 80CCD, and an individual can claim a tax deduction of up to Rs 2 lakh p.a. under these sections.
