The government wants NPS (National Pension Scheme) to be the preferred investment vehicle for pension planning for majority of its citizens. Unfortunately as it happens with most of Government plans, NPS too has flaws which are holding investors back.
To encourage investment in NPS, PFRDA (Pension Fund Regulatory and Development Authority) which regulates it have made certain changes with regards to early Exit, Interim partial withdrawal and exit on maturity rules through this official notification.
In this post we discuss these rules in details:
For the purpose of rules NPS can be classified in 3 types:
- Government sector subscribers – this is NPS accounts for government employees
- All citizens, including corporate sector – this is NPS account for salaried employees opened by employers or opened by self
- NPS – Lite and Swavalamban subscribers
We focus on the top two NPS types – Government sector subscribers and All citizens, including corporate sector
NPS Exit at Maturity:
After retirement (as per service rules) or attaining the age of 60 years you can do the following:
- Continue to contribute to your NPS up to the age of 70 years (Circular by PFRDA on July 27, 2016)
- Withdraw the lumpsum amount in 10 annual installments till the age of 70 years. This option can help you save on taxes! [Clarification by PFRDA on October 29, 2015]
- Defer the purchase of compulsory annuity plan (using minimum 40% corpus) up to 3 years. You will need to inform the concerned authorities at least 15 days in advance for taking this option. If subscriber’s death occurs during this deferred period, then the spouse must buy the annuity.
- Defer the withdrawal of lump sum amount up to 70 years of age. In this case you have to bear the cost of maintenance of account and other regular charges as applicable.
- No need to purchase Annuity if the maturity corpus is less than Rs 2 lakhs
The new rules are definitely an improvement above the existing ones but the compulsory annuity is still a problem. The annuity yields in India are still low and do not suit everyone. The good thing is with the new rules subscribers can remain invested in equity for a longer time and would not have to necessarily withdraw/purchase annuity at market lows.
This also helps people who extend their retirement and are able to invest in NPS.
Early Exit Rules for NPS:
What if you wanted to exit completely from NPS before maturity? Here are the rules:
With the new rules early exit is possible if you satisfy the following conditions:
- In case the accumulated amount is more than Rs 1 lakh and there is no annuity available for the subscriber at that age, he has to continue with NPS until he attains such age. Typically insurance companies have minimum age criteria for annuities as 25 to 30 years of age while you can start NPS at the age of 18. So there can be few such cases.
- In case the accumulated amount is less than Rs 1 lakh, entire amount can be withdrawn without purchasing any annuity.
- For all amounts above Rs 1 lakh, you still need to buy Annuity for minimum 80% of the corpus while the remaining would be paid as lump sum.
So in all the early exit from NPS has been made more restrictive.
Also Read: Download Tax Planning Guide for FY 2018-19
NPS Partial Withdrawal Rules:
Now a subscriber can withdraw partially subject to following conditions:
- He has been subscriber of NPS for at least 3 years (Changed in Aug 10, 2017 from 10 years to 3 years)
- The maximum withdrawal limit is 25% of self contribution (i.e. excluding Employer’s contribution) to the NPS
- You can withdraw partially maximum of 3 times during the entire subscription period
There must be minimum 5 years gap between two withdrawals, except in case where the amount is required for treatment of approved illness.(No more a condition)
The purpose of withdrawal can be any of the following:
- Medical and Incidental expenses in case of disability and incapacitation of the subscriber
- Children’s higher education or Marriage
- Construction/ purchase of house in case you do not have one already
- Treatment of specific critical illness for self, spouse, children or dependent parents
- Set up or acquire a new business [Circular dated 6 Aug 2018]
- for skill development/re-skilling or for any other self-development activities [Circular dated 6 Aug 2018]
List of critical illness approved for partial withdrawal:
- Kidney Failure (End Stage Renal Failure)
- Primary Pulmonary Arterial Hypertension
- Multiple Sclerosis
- Major Organ Transplant
- Coronary Artery Bypass Graft
- Aorta Graft Surgery
- Heart Valve Surgery
- Myocardial Infarction
- Total blindness
- Accident of serious/ life threatening nature
- Any other critical illness of a life-threatening nature as stipulated in the circulars, guidelines or notifications issued by the Authority from time to time.
NPS Exit & Withdrawal in case of Permanent Disability:
PFRDA has come out with new guidelines about facilitation of easy exit & withdrawal in case of disability and incapacitation of the subscriber converted under national pension system (NPS) on April 13, 2018. Here are the rules:
For Government Sector Subscribers:
If the employer certifies that the subscriber has been discharged from the services on account of invalidation or disability, in such case, exit rules would be same as in the case of withdrawal at maturity.
For other than Government sector subscribers (including individual and corporate sector subscribers, NPS – Lite and Swavalamban)
If subscriber is physically incapacitated or has suffered a bodily disability leading to his incapability to continue with his individual pension account under NPS, the subscriber needs to submit a disability certificate from a Government surgeon or Doctor (treating such disability or invalidation of subscriber) stating the nature and extent of disability.
- the affected subscriber shall not be in a position to perform his regular duties and there is a real possibility of the affected subscriber, being not able to work for the remaining period of his life
- Percentage of disability is more than 75%
If all the conditions are satisfied the exit rules would be same as in the case of withdrawal at maturity.
Partial Withdrawal is allowed for Medical and Incidental expenses in case of disability and incapacitation of the subscriber
NPS Payment on Death:
On Death, only 20% of the accumulated amount is paid to the nominee or legal heirs while at least 80% of the amount would be used to purchase the annuity scheme. In case the NPS amount is less than Rs 2 Lakh, the entire corpus as of that date is paid to the nominee or legal heirs.
Some more rules:
- NPS account cannot be seized or attached by any court on appeal of creditors.
- You cannot change or cancel once the annuity has been purchased except during the free look period as specified by insurance company.
- There is no portability between Government NPS accounts and other accounts. So in case a government employee quits and joins a private company he would necessarily have to close this account and make early exit.
NPS even after all the above changes should not be the preferred option for retirement planning mainly because of unfavorable tax treatment at maturity and compulsory buying of annuity using substantial corpus. You can accumulate much more and have more flexibility by investing in Equity Mutual Funds, PPF, EPF etc.