NPS for central government employees: the 10% plus 14% contribution and Tier I investment choices

For a central government employee who joined service on or after 1 January 2004, the National Pension System (NPS) is not a choice but a statutory default. Two numbers define the arrangement: the employee contributes 10% of basic pay plus dearness allowance every month, and the government adds 14% of the same base. That 24% combined flow, invested through a Permanent Retirement Account Number (PRAN) since the scheme opened to central staff in 2004, is what eventually funds retirement. This guide compares the Tier I investment choices open to that corpus, sets out how each rupee is taxed on the way out, and works through a drawdown at age 60 so you can see the annuity and lump-sum split in figures rather than adjectives.

The Scheme Explained

NPS became mandatory for central government employees recruited on or after 1 January 2004, with the armed forces the single carve-out, per the PFRDA framework for central government NPS. The contribution formula has two fixed legs: the employee pays 10% of basic plus dearness allowance, and the employer (the government) pays 14% of basic plus dearness allowance. On a basic-plus-DA of Rs 60,000 a month, that is Rs 6,000 from the employee and Rs 8,400 from the government, or Rs 14,400 flowing into the PRAN every month.

Every subscriber's money sits in a Tier I account, the mandatory retirement tier that carries the tax breaks and the lock-in until age 60. A separate Tier I versus Tier II distinction matters here: Tier II is a voluntary, no-lock-in wrapper with no exit restriction and no default tax deduction, so the 10%-plus-14% flow described above always lands in Tier I. The corpus is managed by registered Pension Fund Managers (PFMs), and since the central government scheme was liberalised, a subscriber can choose the fund manager and the allocation pattern rather than being held to a single default blend.

One structural feature works quietly in the subscriber's favour: because both legs are struck on basic plus dearness allowance, every DA revision and every pay-commission increment lifts the monthly contribution automatically. A subscriber on Rs 60,000 of basic-plus-DA today whose base rises 6% a year would be contributing closer to Rs 25,800 a month combined by year 20, well above the flat Rs 14,400 used in the worked example later. That built-in escalation is why the NPS corpus for long-serving central staff typically outpaces a static-contribution projection.

The four Tier I options a central government subscriber can select are set out below. The equity ceilings and the glide paths follow PFRDA's life-cycle design; the exact allocation of the Default Scheme is the government pattern historically shared across the three government-sector PFMs.

Because NPS returns are entirely market-linked, none of these options carries a declared or guaranteed rate; contrast that with small-savings benchmarks such as the 7.1% on PPF or the 8.2% on SCSS fixed for the July to September 2026 quarter. The NPS calculator lets you test how a G-100, LC-25 or LC-50 assumption changes the projected corpus for your own basic-plus-DA and remaining service years.

Tax on Withdrawal

NPS is often described as an EEE-style instrument, and for a central government subscriber that holds across three points: contribution, growth and a large slice of the exit. On the way in, the employee's 10% qualifies under Section 80CCD(1) within the overall Rs 1.5 lakh ceiling of Section 80CCE, and an extra Rs 50,000 is available under Section 80CCD(1B). Two cautions matter. Section 80CCD(1B)'s Rs 50,000 is available only under the old tax regime; it is not allowed in the new regime. The government's 14% employer contribution, however, is deductible under Section 80CCD(2) and that deduction survives in both regimes, which is what keeps NPS attractive for salaried staff who have moved to the new slabs.

One point of arithmetic is routinely missed. The employer's 14% deduction under Section 80CCD(2) sits outside the Rs 1.5 lakh combined ceiling of Section 80CCE, so it does not compete with your PPF, life insurance or ELSS for that Rs 1.5 lakh of headroom. Only the employee's own 10% under Section 80CCD(1) counts inside the Rs 1.5 lakh cap, while the Rs 50,000 of Section 80CCD(1B) sits on top of it, but again only in the old regime. For a central employee on Rs 60,000 basic-plus-DA, the government's Rs 8,400 monthly, roughly Rs 1.01 lakh a year, is therefore fully deductible in both regimes without touching any other limit.

Growth inside the fund is not taxed year on year; there is no annual levy on the NAV appreciation of the G, C or E schemes, unlike a taxable mutual fund exit where equity long-term gains above Rs 1.25 lakh attract 12.5% under the post-Budget-2024 rules. The decisive event is the exit at age 60. Under Section 10(12A) of the Income-tax Act, up to 60% of the corpus withdrawn as a lump sum at superannuation is fully tax-exempt. The remaining minimum 40% must be used to purchase an annuity, and that annuity is where the tax finally bites: the monthly pension it pays is taxed as income at your slab in the year of receipt, exactly like any annuity payout, per incometax.gov.in.

Two further reliefs are worth naming with their sections. A partial withdrawal before 60, permitted up to 25% of the subscriber's own contributions for defined needs, is exempt under Section 10(12B). And if the total accumulated corpus at 60 is Rs 5 lakh or less, the subscriber may withdraw 100% as a lump sum with no compulsory annuitisation at all. The table below maps each exit rupee to its treatment.

Worked Drawdown

Take a central government employee, aged 30, with basic plus dearness allowance of Rs 60,000 a month, contributing the mandatory 10% while the government adds 14%, for a combined Rs 14,400 a month. Hold that monthly figure level and assume a 9% annualised return, chosen purely as an illustrative market-linked assumption and not a guaranteed NPS rate. Over 30 years to age 60 the accumulation looks like this.

This Rs 2.64 crore figure is deliberately conservative, because it freezes the contribution at Rs 14,400 for all 360 months. In reality the base rises with every DA revision, so a central employee retiring after 30 years of service would usually reach a materially larger corpus; the flat-contribution number simply gives a clean floor to reason from. Run your own escalating basic-plus-DA through the retirement projections rather than relying on the level figure.

At 60 the corpus of roughly Rs 2.64 crore is split under the exit rules. Taking the full 60% as the tax-free lump sum gives about Rs 1.58 crore in hand, exempt under Section 10(12A). The mandatory 40%, about Rs 1.06 crore, buys an annuity: at an illustrative 6% annuity rate that yields roughly Rs 6.34 lakh a year, or about Rs 52,800 a month, taxed at the subscriber's slab in each year of receipt. On the FY 2025-26 new regime, where the first Rs 4 lakh is nil-rated and the Section 87A rebate now reaches Rs 60,000 up to Rs 12 lakh of income, a retiree whose only income is this pension would owe little or nothing on it.

The alternative to a life annuity is a systematic withdrawal plan, or SWP, run on the lump-sum portion rather than the annuitised 40%. Where an annuity locks in a fixed rate for life and taxes the whole payout at slab, an SWP keeps the capital invested and market-linked and, on equity funds, taxes only the gain portion of each redemption, with long-term equity gains above Rs 1.25 lakh a year charged at 12.5%. The trade is certainty against flexibility: the annuity cannot run dry but cannot rise with inflation either, while the SWP can be indexed upward but can be exhausted if markets disappoint. Model both sides for your own corpus with the annuity versus SWP calculator and stress-test the longevity of the drawdown with the retirement drawdown calculator.

For central staff, the drawdown decision now sits alongside the Unified Pension Scheme (UPS), the assured-pension option offering 50% of average pay that became available to eligible central government employees from 1 April 2025. Where NPS delivers a market-linked corpus you draw down yourself, UPS offers a defined 50% assured pension, and the choice between a self-managed NPS corpus and an assured UPS payout is the central drawdown question this cohort faces.

FAQ

How much does the government contribute to a central employee's NPS?

The government contributes 14% of basic pay plus dearness allowance, on top of the employee's own 10%, for a combined 24% monthly flow into the Tier I PRAN, per the PFRDA central government framework. On a basic-plus-DA of Rs 60,000, that is Rs 8,400 from the government and Rs 6,000 from the employee each month.

Is the 80CCD(1B) deduction of Rs 50,000 available in the new tax regime?

No. The additional Section 80CCD(1B) deduction of Rs 50,000 is available only under the old tax regime and cannot be claimed in the new regime. The employer's Section 80CCD(2) contribution deduction, by contrast, is allowed in both regimes, which is what preserves NPS's tax appeal for staff on the new FY 2025-26 slabs.

What is the difference between G-100, LC-25 and LC-50 in Tier I?

Scheme G (G-100) holds 100% government securities with no equity, giving the lowest risk. LC-25 caps equity at 25% and LC-50 caps it at 50% up to age 35, with both life-cycle funds tapering equity as the subscriber ages, following PFRDA's glide-path design. A central subscriber who makes no choice stays in the Default Scheme, the government-set blend.

How much of the NPS corpus is tax-free at age 60?

Up to 60% of the corpus taken as a lump sum at superannuation is fully exempt under Section 10(12A) of the Income-tax Act. The remaining minimum 40% must buy an annuity, whose monthly pension is then taxed at your income slab in the year received, per incometax.gov.in.

Can a central employee withdraw the whole NPS corpus at 60?

Only if the total accumulated corpus is Rs 5 lakh or less, in which case 100% can be withdrawn as a tax-free lump sum with no annuity requirement. Above that threshold, at least 40% of the corpus must be annuitised and up to 60% can be taken as the exempt lump sum.

Are pre-retirement partial withdrawals from NPS taxed?

No. A partial withdrawal of up to 25% of the subscriber's own contributions, permitted for defined needs such as children's education, medical treatment or a first home, is exempt under Section 10(12B) of the Income-tax Act. The employer's 14% share is excluded from the base used for this 25% calculation.

How does NPS drawdown compare with the Unified Pension Scheme?

NPS gives a market-linked corpus that the retiree draws down through a lump sum plus annuity, while the Unified Pension Scheme, available to eligible central government employees from 1 April 2025, offers a defined 50% assured pension of average pay. The former carries market risk and flexibility; the latter offers certainty, and eligible staff choose between them.