National Pension System: Structure, Tiers and Eligibility

The National Pension System (NPS) is a voluntary, defined-contribution retirement savings framework regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed to help subscribers build a retirement corpus through market-linked investments while retaining portability across employers and locations.

Available to Indian citizens as well as NRIs and OCIs, NPS combines long-term savings with flexible account options, investment choices and phased withdrawal rules. For Prelims, the scheme’s eligibility, tier structure, investment models and exit norms are especially important.

Key Structural Features and Eligibility

• Regulatory framework: NPS is governed by the PFRDA under the PFRDA Act, 2013.
• Eligible subscribers: All Indian citizens, including resident citizens, Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs), can join the scheme.
• Age limit: Entry is allowed between 18 and 70 years.
• Extended contribution period: Subscribers may continue making voluntary contributions up to 85 years of age.
• PRAN: Each subscriber gets a unique, portable 12-digit Permanent Retirement Account Number (PRAN).
• Portability: PRAN remains active across employers and across locations in India.
• Late entrants: Under the All Citizen Model, there is no mandatory minimum vesting period for persons joining after 60 years of age, and they may exit at any point.

Tier I and Tier II Accounts

NPS has a two-tier account structure. Tier I is the core retirement account, while Tier II is an optional savings account with more liquidity.

• Tier I purpose: It is the mandatory retirement-linked account for long-term corpus building.
• Tier II purpose: It functions as a voluntary savings option with easier withdrawals.

Scheme Categorisation and Investment Choices

• Scheme classification: Under PFRDA guidelines, schemes are grouped into Lifecycle-based Schemes (Auto Choice), Active Choice, NPS Sanchay, Multiple Scheme Framework (MSF), and curated or thematic schemes under Regulation 4A.
• Example of thematic scheme: NPS Vatsalya for minors is included under curated or thematic offerings.
• Active Choice: Subscribers can manually allocate funds across three asset classes: Equity (E), Corporate Debt (C) and Government Bonds (G).
• Equity limit in Tier I: Equity exposure is capped at 75% under Tier I.
• Equity in Tier II: Equity exposure is uncapped in Tier II.
• MSF structure: Multiple Scheme Framework schemes are divided into five risk-based categories based on equity exposure.
• MSF categories: Category A has 80% to 100% equity, while Category E has 0% to 10% equity.
• MSF consolidation rule: Pension fund managers can offer a maximum of two MSF schemes per category under each account tier.

Point of Presence Charge Structure

• PoP onboarding fee: A standardized one-time onboarding fee of ₹200 per PRAN applies.
• Recovery mode: The onboarding fee is recovered by Central Recordkeeping Agencies (CRAs) through quarterly instalments of ₹50 via unit cancellations.
• Digital onboarding: Fully digital, non-face-to-face onboarding attracts a reduced charge of ₹100, subject to regulator-prescribed registration terms.
• Annual PoP charge: Standard annual charges are capped at 0.20% per annum of Assets Under Management (AUM).
• Computation method: The charge is adjusted quarterly through Net Asset Value (NAV) computations for active schemes.
• Dormant accounts: Dormant accounts are excluded from this annual charge computation.

Exit Rules and Withdrawal Options

• Government subscribers: The 60:40 exit rule applies, requiring at least 40% of the corpus to be used to purchase an annuity.
• Lump-sum under government rules: Up to 60% of the corpus may be withdrawn as a lump sum or through Systematic Lump Sum Withdrawal (SLW).
• Corpus above ₹12 lakh: Non-government subscribers may withdraw up to 80% as a lump sum or via SLW, with at least 20% going to annuities.
• Corpus between ₹8 lakh and ₹12 lakh: Up to ₹6 lakh may be withdrawn as a lump sum, while the remaining amount may go to annuity or Systematic Unit Redemption (SUR) over a minimum of six years.
• Corpus up to ₹8 lakh: A 100% lump-sum withdrawal is permitted.
• Partial withdrawal limit: Subscribers may partially withdraw up to 25% of their own contributions.
• Partial withdrawal frequency: Such withdrawals can be made up to four times before retirement.
• Medical withdrawal: Withdrawal for medical reasons is now allowed for any hospitalization, not only specified critical illnesses.

Key Prelims Takeaways

• Regulator: NPS is regulated by PFRDA under the PFRDA Act, 2013.
• Eligibility: Indian citizens, NRIs and OCIs aged 18 to 70 years can join.
• Contribution extension: Voluntary contributions can continue up to 85 years of age.
• Account portability: The 12-digit PRAN is portable across employers and locations.
• Tier I vs Tier II: Tier I is the retirement account; Tier II is optional and liquid.
• Investment choice: Active Choice allows allocation among E, C and G assets.
• MSF limit: Pension funds may offer a maximum of two MSF schemes per category per tier.