FAQs: Lumpsum Withdrawal and Annuity Purchase at the time of exit from NPS

In this post, I will answer a few queries that investors may have while exiting NPS (National Pension Scheme).

There could be three types of exits from NPS:

1. Normal exit (At the age of 60 in case of All Citizens Model, At the time of superannuation in case of Government NPS and Corporate Sector NPS)
2. Pre-mature exit (before the age of 60 or superannuation as applicable)
3. At the time of the death of the subscriber

Let’s look at some of these common queries about deferral of lumpsum and annuity purchase at the time of exit. Before moving ahead, it may be a good idea to revisit latest NPS exit and partial withdrawal rules.

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#1 Can I defer lumpsum withdrawal in case of premature exit from NPS?

In case of exit from NPS at the time of superannuation or the age of 60, at least 40% of the amount shall be used to purchase an annuity plan.

The remaining amount (maximum 60%) can be withdrawn lumpsum. You have an option to postpone the withdrawal of lumpsum amount.

You can withdraw the portion (that has not been used to purchase an annuity plan) in up to 10 annual instalments till the age of 70. This flexibility is available to both Government and All Citizen NPS subscribers.

However, if you are exiting NPS pre-maturely, you cannot defer the withdrawal of lumpsum amount.

On pre-mature exit, you have to use at least 80% of the accumulated corpus for the purchase of an annuity plan. For the amount not used to purchase an annuity plan (maximum of 20%), you will have to withdraw the complete amount at the time of exit from NPS.

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#2 Can I defer annuity purchase in case of premature exit from NPS?

In case of normal exit (superannuation or turning 60), you can defer purchase of annuity by up to 3 years.

No such flexibility in case of premature exit from NPS.

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#3 Can I extend NPS beyond the age of 60 (after turning 60 or superannuation)?

In case of All Citizens NPS (including corporate sector NPS), you can extend your NPS account even beyond the age of 60 years i.e. you can keep making investments even beyond the age of 60 years or superannuation.

You can continue to invest till the age of 70. However, if you want, you can exit anytime by giving due notice.

Do note, you may have indicated your preference to continue the account till the age of 70 at the time of extension. However, despite this, you can still exit the account whenever you want.

Please understand this flexibility is available only to All Citizens subscribers. Government NPS subscribers do not have such flexibility.

If you want to exercise this option of extending NPS, you must convey this decision to CRA (NSDL or Karvy) at least 15 days prior to turning 60 or the date of superannuation, whichever is applicable. If you fail to do that, you will not be allowed to exit your NPS account.

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#4 My NPS account is under Corporate Sector NPS. How can I extend NPS account?

If your account is under Corporate Sector NPS, your employer must also be making NPS contribution to your account.

If you want to extend your NPS account beyond superannuation or the age of 60, you will have shift your NPS account to individual mode (All Citizens model).

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#5 If I extend my NPS account, what value will be used for mandatory 40% purchase of annuity?

Accumulated corpus at the age of 60 (or superannuation) or the corpus at the time of final exit from NPS?

In case of extension, NPS corpus at the time of final exit from the system shall be used to calculate mandatory annuity purchase amount.

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#6 Can I defer purchase of annuity or withdrawal of lump sum if you extend your NPS Account?

No, you cannot defer annuity purchase or withdrawal of lump sum if you exercise your option to continue NPS account beyond 60 or superannuation.

According to the regulator, since you have the choice to exit NPS at any time during the extended period as per your wish, you won’t get an option to defer annuity purchase or lumpsum withdrawal.

#7 Can subscriber who joined NPS between the age of 60 and 65 defer annuity purchase or lumpsum withdrawal?

PFRDA has increased the joining age (entry age) from 60 to 65. This is applicable only to All Citizens subscribers (including Corporate Sector NPS). Not applicable to Government sector NPS.

Deferment of annuity purchase and lumpsum withdrawal is not allowed in such cases. The reason is the same as mentioned in the previous section. They can exit whenever they want.

However, there is a minor difference.

In case of joining NPS after the age of 60, exit before completing 3 years shall be considered premature exit (minimum 80% annuity purchase).

Exit after 3 years shall be considered normal exit (minimum 40% annuity purchase).

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#8 What about Tier 2 NPS account?

Everything discussed above pertained to NPS Tier 1 account.

What about NPS Tier II account?

Well, NPS Tier 2 (or Tier II) account is intricately tied to NPS Tier 1 account.

NPS Tier 2 can’t exist in isolation.

If you extend NPS Tier 1, you can continue making investments in Tier 2 account too.

If you choose to exit NPS (not extend the account) and withdraw lump sum amount, Tier 2 account will also have to be closed.

If you exit NPS and defer withdrawal of lumpsum amount, you can continue NPS Tier 2 account as you were before. Only switch from Tier 2 to Tier 1 NPS account is allowed. As I understand, you can even make fresh investments during such time.

However, Tier 2 account has to be closed when you withdraw lumpsum amount from Tier 1 NPS account. If you opted for phased withdrawal (in annual instalments) from Tier 1 NPS, Tier 2 account must be closed at the time of first withdrawal from NPS account.

Source/Additional Links

PFRDA Circular for Deferment of lumpsum and annuity purchase and continuation of Tier 2 accounts (dated October 9, 2017)

NPS Tax Benefits 2018