Working Mechanism of NPS for Federal Workers
For state government employees in India, the National Pension System (NPS) has become a crucial part of their retirement planning. The NPS, introduced for central government employees in 2004, was extended to state government employees and has since become a mandatory contribution for most new recruits.
**Contributions**
State government employees are eligible to join NPS, with the minimum contribution for Tier-I account set at ₹500 per contribution, amounting to a minimum annual contribution of ₹1,000. Tier-II, an optional account, does not have a mandatory minimum contribution. However, government employees have a 3-year lock-in period to avail tax benefits on Tier-II investments.
**Investment**
Contributions to the NPS are invested in schemes regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The investments are typically divided among equity, government bonds, and corporate debt funds according to guidelines. Tier-I is a long-term investment with restrictions on withdrawals and mandatory annuity purchase, while Tier-II offers more flexible withdrawal options.
**Withdrawals**
Upon retirement, state government employees must invest at least 40% of their pension corpus in an annuity, providing lifelong monthly pension post-retirement. The remaining 60% can be withdrawn immediately or deferred up to age 70. If the total accumulated corpus is less than ₹5 lakh, the subscriber can withdraw the entire corpus instead of annuity purchase.
At voluntary retirement or exit, at least 80% of the corpus must be used to purchase an annuity. If the corpus is less than ₹2.5 lakh, full withdrawal is permitted. The remaining balance after annuity purchase can be withdrawn in lump sum. In the event of the subscriber's death, the entire pension corpus is paid to the nominee or legal heir.
**Tax Benefits**
Contributions by state government employees to NPS are eligible for tax deductions under Section 80CCD(1) and additional deductions under Section 80CCD(1B) up to Rs 50,000 above the Rs 1.5 lakh limit under Section 80C. Partial withdrawals up to 25% of own contributions are tax-free under specified conditions. Tier II contributions by government employees are eligible for tax deductions only if subjected to a 3-year lock-in.
**Old Pension Scheme (OPS) Context**
Employees recruited before December 31, 2003, in some states like Rajasthan, Punjab, etc., remain on OPS, which guarantees a defined pension based on the last drawn salary, with minimum qualifying service reduced from 20 to 10 years. Some states have restored OPS alongside NPS, but new employees mostly fall under NPS rules.
The NPS offers state government employees a structured retirement savings pathway with mandatory annuity purchases for post-retirement income while allowing limited lump sum withdrawals and tax benefits to incentivize contributions. The exact implementation may slightly vary by state, especially where OPS is still operative alongside NPS.
Investing in the National Pension System (NPS) serves as a personal-finance strategy for state government employees, with the finance industry playing a significant role in managing contributions and investments. The investment app for the NPS allows state employees to contribute towards their retirement planning, with the contributions divided among various schemes, including equity, government bonds, and corporate debt funds.
