National Pension System

Quick Summary

The National Pension System (NPS) is a voluntary retirement scheme regulated by the PFRDA. It allows individuals to build a corpus by investing in a mix of equity and debt funds. For a business, it is a way to offer extra retirement benefits and tax savings on top of the mandatory Provident Fund (PF).

What is NPS?

NPS is a market-linked pension fund. Unlike fixed-rate savings, your returns depend on how the market performs. Every member gets a Permanent Retirement Account Number (PRAN). This number is unique and stays with the person for life. If they change jobs, they don’t need a new account; they just move the existing one to the new employer.

As of 2026, the system has two tiers. Tier I is the primary retirement account with tax breaks and a lock-in period. Tier II is a voluntary savings account that works like a mutual fund, allowing you to withdraw money whenever you want.

Importance of NPS

Adding NPS to a compensation package is a strategic move for a few reasons:

• Tax Breaks for the Business: Any amount the company contributes (up to 14% of Basic + DA) can be claimed as a business expense. This lowers the company’s taxable profit.
• Better CTC Structure: It allows you to offer a higher total value to senior staff without increasing their immediate tax burden.
• No Management Hassle: The government handles the fund managers and record-keeping. The company doesn’t need to set up a private trust or manage investments.
• Employee Choice: It isn’t a “one size fits all” plan. Employees can choose their own investment risk levels, which makes it a more personalized benefit.

Core Parts of the System

• PRAN: The 12-digit ID that tracks all contributions.
• Investment Options: “Auto Choice” (age-based) or “Active Choice” (manual split between stocks and bonds).
• Annuity: The portion of the fund used to provide a monthly pension after retirement.
• NPS Vatsalya: A 2026 feature where parents can start a pension for kids, which turns into a standard NPS account when they turn 18.

Changes in NPS

The Income Tax Act, 2025 and current labour codes have introduced these changes for the 2026 cycle:

• 14% Employer Limit: Private sector companies can now contribute up to 14% of Basic + DA as a tax-deductible expense. This finally matches the limit previously only available to government employees.
• The 80% Cash Rule: If your total savings are over ₹12 lakh at retirement, you can now take 80% as a tax-free lump sum. You only have to put the remaining 20% into a monthly pension (annuity).
• Full Payout: If the total corpus is ₹8 lakh or less, the subscriber can withdraw the whole amount in cash without being forced to buy a pension.
• Higher Age Limit: You can now keep your account active and continue investing until you are 85 years old.
• The ₹7.5 Lakh Cap: Be careful—the combined employer contribution to PF, NPS, and any Superannuation fund cannot exceed ₹7.5 lakh per year. Anything over this is taxed as a perquisite for the employee.

Management Tips For HR Teams

• Onboarding Integration: Ask for the PRAN during the joining process. If a new hire doesn’t have one, help them apply for an “e-NPS” account immediately so there are no gaps in their savings.
• Automate the Math: Update your payroll system to calculate the 14% contribution automatically. This ensures you are maximizing tax benefits while staying under the ₹7.5 lakh cap.
• KYC Checks: Remind your team to finish their “e-nomination” and link their Aadhaar. Incomplete KYC is the #1 reason why contributions get stuck or withdrawals get rejected.
• Clear Exit Procedures: When someone leaves, “un-map” their PRAN from your corporate portal promptly so they can move it to their next job without delays.

FAQs