Rule 5 — NPS Rules
Original Rule Text
5. Therefore, introduction of a self-sustaining pension scheme was the need of the hour. Such a scheme would require the employee to contribute a regular amount during his service and the Govt also to contribute regularly, forming a corpus to provide regular monthly pension income to the employee after retirement depending the contribution accumulated by the employee during his service period.
- Rules/Regulations to Govern NPS
What This Means
Given the fiscal unsustainability of the old Defined Benefit Pension system (due to rising retiree numbers, longer life expectancy, and the absence of a dedicated funding mechanism), the government recognized the urgent need for a self-sustaining alternative. The answer was a contributory pension scheme — one where both the employee and the employer make regular contributions during service, building a corpus that is sufficient to support the employee in retirement.
The key principle of the new approach is pre-funding: money is set aside during the employee's working life, not drawn from future budgets after retirement. The retirement benefit then depends on what has been contributed and what investment returns have been earned. This shifts the model from a fiscal burden on the government to a self-funded savings system — underpinning the entire rationale for NPS.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1The unsustainability of the old scheme demanded a new, self-sustaining pension architecture.
- 2NPS is built on the principle of pre-funding: contributions made during service, not paid from future budgets.
- 3Both the employee and the government contribute regularly, creating a growing corpus.
- 4Retirement benefits under NPS depend on the corpus accumulated (contributions + investment returns).
- 5This approach removes the open-ended fiscal liability from the government's balance sheet.
Practical Example
Think of NPS like a long-term recurring deposit. Every month, Pradeep and his employer each put money into his PRAN — like two co-investors depositing into a joint savings plan. By the time Pradeep retires after 30 years, this corpus has grown to a substantial amount through compound investment returns. He uses 60% immediately and 40% to buy a pension. The government never has to worry about where to find money to pay Pradeep's pension after he retires — it was all pre-funded during his working years.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
▼
▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.