The New Pension Scheme works on defined contribution basis and will have two tiers – Tier-I and II. Contribution to Tier-I is mandatory for all Government servants joining Government service on or after 1-1-2004 (except the armed forces in the first stage), whereas Tier-II will be optional and at the discretion of Government servants.
In Tier-I, a Government servant will have to make a contribution of 10% of his basic pay plus DA, which will be deducted from his salary bill every month by the PAO concerned. The Government will make an equal matching contribution. However, there will be no contribution from the Government in respect of individuals who are not Government employees.
Tier-I contributions (and the investment returns) will be kept in a non-withdraw able Pension Tier-I Account. Tier-II contributions will be kept in a separate account that will be withdraw able at the option of the Government servant. Government will not make any contribution to Tier-II account.
The existing provisions of Defined Benefit Pension and GPF would not be available to the new recruits in the central Government service, i.e. to the Government servants joining Government service on or after 1-1-2004.
In order to implement the Scheme, there will be a Central Record Keeping Agency (CRA) and several Pension Fund Managers (PFM) to offer three categories of Schemes to Government servants, viz., options A,B and C based on the ratio of investment in fixed income instruments and equities. The participating entities (PFMs and CRA) would give out easily understood information about past performance, so that the individual would be able to make informed choices about which scheme to choose.
An independent Pension Fund Regulatory and Development Authority (PFRDA) will regulate and develop the pension market.
As an interim arrangement, till such time the Statutory PFRDA is set up, an interim PFRDA has been appointed by issuing an executive order by M/o Finance (DEA).
Till the regular Central Record Keeping Agency and Pension Fund Managers are appointed and the accumulated balances under each individual account are transferred to them, such amounts representing the contributions made by the Government servants and the matching contribution made by the Government will be kept in the Public Account of India. This will be purely a temporary arrangement as announced by the Government.
Tier-II will not be made operative during the interim period.
A Government servant can exit at or after the age of 60 years from the Tier-I of the Scheme. At exit, it would be mandatory for him to invest 40 per cent of pension wealth to purchase an annuity (from an IRDA-regulated Life Insurance Company) which will provide for pension for the lifetime of the employee and his dependent parents/spouse. He would receive a lump-sum of the remaining pension wealth which he would be free to utilize in any manner. In the case of Government servants who leave the Scheme before attaining the age of 60, the mandatory annuitization would be 80% of the pension wealth.

Notification issued by PFRDA