National Pension System (NPS)

The National Pension System is a defined-contribution retirement savings system regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Under NPS, individuals contribute money during their working years. These contributions are invested through pension fund managers in a mix of assets such as:

• Equity
• Government securities
• Corporate debt
• Other permitted investments

The value of an NPS account depends on the contributions made and the investment performance of the chosen funds. Returns are therefore not fixed or guaranteed.

NPS primarily uses two account types. Tier I is the main retirement account and has restrictions on withdrawals. Tier IIis an optional investment account with greater withdrawal flexibility, subject to applicable rules.

At retirement or eligible exit, the accumulated corpus is generally used partly for a lump-sum withdrawal and, where required, partly to purchase an annuity, which can provide regular income after retirement.

NPS offers different investment choices, allowing investors either to select their own asset allocation or use an automatic allocation approach that changes with age.

Its main purpose is to encourage disciplined, long-term retirement saving rather than provide easy access to money for short-term needs.

Building a Retirement Corpus Over Time

Anita, age 30, starts contributing ₹8,000 every month to her NPS account.

Her contributions are invested across equity, government securities, and corporate debt according to her chosen allocation.

She continues investing regularly for many years. As the investments grow, her retirement corpus depends on both the amount she contributes and the returns earned by the underlying assets.

When she eventually retires, she can use the corpus according to the applicable NPS exit rules, including a combination of lump-sum withdrawal and retirement income through an annuity.