NPS for Government Employees vs. Individuals: Key Differences

In 2004, the Central Government replaced the Old Pension Scheme (OPS), which had a defined-benefit (DB) pension, with the National Pension System (NPS). The NPS consists of a defined-contribution (DC) system, and falls under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Indian government. A social security initiative, it is open to public, private, and unorganised sector employees on a voluntary basis, except for the armed forces.

 

The National Pension System encourages systematic savings through regular contributions for life after retirement. Under this scheme, your payments are collected into a pension fund managed by professional fund managers regulated by PFRDA, in accordance with approved investment guidelines. This amount is invested in a mix of equity, corporate debts, government securities, and alternative assets. Any Indian citizen aged between 18 and 70 years can opt for NPS.

 

While structurally, NPS for government employees is the same as NPS for corporate employees and individuals, they differ in terms of their operations. This is because the NPS scheme for central and state government employees follows different rules.

As previously mentioned, structurally, you will not find any difference between NPS for state government employees and NPS for public or corporate employees. For example, the NPS Tier-I and Tier-II account structures are the same for all entities. Moreover, the NPS interest rates for govt. employees and individuals remain the same, and typically range between 9% and 12%.

 

However, if you consider the rules and processes, you will find several differences. Here are some of the most important differences between the NPS scheme for govt. employees and NPS scheme for individuals.

 

• Eligibility: Individuals between 18 and 70  years can opt for NPS on a voluntary basis, and need to make regular contributions towards the scheme. Even employees from the unorganised sector can register for NPS. However, for government employees, NPS is mandatorily applicable (except for armed forces).

• Contribution: In the case of NPS for government employees, the contribution is received from the employees and the government. Employees pay 10% of their pay and Dearness Allowance monthly towards the NPS scheme. On the other hand, the central or state government pays 14% of the pay and Dearness Allowance (as per the most recent mandate). Coming to non-government employees, they can register for NPS on a voluntary basis, and make regular contributions.

 

Upon retirement or after exiting from the scheme, the government servant receives a pension based on the accumulated corpus. They can withdraw 60% of the amount as lump-sum, and use the remaining 40% to purchase an annuity which provides a regular pension. Even individuals must invest at least 40% of the accumulated corpus in an annuity, and can withdraw the remaining 60% in a lump sum.

 

• Registration: If you are an individual willing to apply for the NPS scheme, you must approach the Point of Presence (PoP). However, if you are a government servant,  your application is sent to the nodal officers.

• Voluntary Contribution: The NPS scheme for govt. employees entails NPS contributions made through the nodal officer via salary deductions. The nodal offices forward the money to the Trustee Bank, and upload the details into the CRA system. However, when it comes to individuals, they have to initiate the process online or offline. They can visit the eNPS-NSDL website, and contribute to NPS Tier-I and Tier-II accounts.

• Investment Options: Typically, the funds of the National Pension Scheme for government employees are shared among the three state-owned pension fund managers, unless specified otherwise. These include SBI, UTI, and LIC. Government employees have a limited investment choice, as the legacy contribution follows the default model, and only the incremental flow can be moved to new fund managers. 

 

Individuals enjoy greater freedom, as their total contribution can be moved across fund managers. They can select from different PFMs and investment options.

nitially, NPS was only made available to central government employees. However, as NPS did not have a functional structure, they couldn’t start with an individual NPS account for many years. While the NPS ecosystem was evolving, employees had to make contributions towards the scheme. In April 2007, NSDL was selected as the Central Recordkeeping Agency (CRA), and in April 2010, the funds made their way into the CRA system.

 

Apart from greater transparency and control owing to a fully functional regulatory body, government servants have also enjoyed greater returns in the recent past. In 2019, the PFRDA, in an attempt to make NPS more attractive to individuals over 65 years, allowed fund managers to invest up to 50% of the contributions towards equity.

Structurally, there is very little difference between the National Pension Scheme for government employees and individuals. However, you will find several key distinctions when you pay attention to the rules and operations. This includes the eligibility criteria, registration, contribution process and methods, and investment options.