Definition of NPS (National Pension System)
The National Pension System (NPS) is a government-sponsored retirement savings scheme in India regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It was launched in 2004 for government employees and opened to all citizens in 2009.
NPS has two tiers: Tier 1 (mandatory, locked until age 60, up to 3 lakh tax deduction under 80C and 80CCD) and Tier 2 (voluntary, no lock-in, no tax benefit). On retirement, 40% of the corpus must be used to buy an annuity; 60% is available as a lump sum (partially tax-free).
NPS invests in a mix of equities, corporate bonds, government securities, and alternative assets. The equity portion (Asset Class E) follows index funds and can be up to 75% for younger investors. NPS is a cost-efficient long-term retirement tool but has limited liquidity and mandatory annuity restrictions that FIRE investors need to carefully consider.