We had expressed our reservations about New Pension Scheme (NPS) in one of our earlier posts. Pension Fund Regulatory and Development Athority (PFRDA), the regulator for NPS, has come out with revised rules for withdrawal and exit from NPS. We will review these proposed changes in NPS and try to assess if such changes are beneficial to the investors/subscribers of NPS. In this post, we shall focus only on Government Sector NPS (for central and state government employees) and Corporate Sector NPS (for private sector employees/self employed). We will not focus on changes on changes for NPS-Lite or Swavalamban subscribers). To know about NPS basics, please go through our post on NPS. Let’s start with the old withdrawal and exit rules.
Old Exit and Withdrawal rules for NPS
- Upon attainment of 60 years: At least 40% of the accumulated wealth in the NPS account needs to be utilized for purchase of annuity/pension. Remaining 60% can be withdrawn as lump sum. The subscriber has an option to defer the withdrawal of lump sum amount till the age of 70. At the age of 70, any balance in the account will be paid out to investor as lump sum. There is no compulsion to purchase annuity in case the total accumulated wealth is less than Rs 2 lacs.
- Before attainment of 60 years: At least 80% of the accumulated wealth in the account needs to be utilized for purchase of annuity. The balance can be withdrawn as lump sum.
- Death of the subscriber: Entire accumulated wealth to be paid to the nominee/legal heir. No option for the purchase of annuity.
- Deferment of Annuity: A subscriber has an option an defer mandatory annuity purchase (as mentioned in (a) and (b)) by up to 3 years
No partial withdrawal from NPS was permitted before the age of 60.
Problems with old rules
The common refrain was that investors/subscribers did not have the option of accessing these funds even in cases of emergency.
An additional concern was that a number of organisations had retirement age lower than 60. Hence, if the retirement age was 58, the subscriber would have had to contribute for 2 more years to be eligible for a normal exit. In such a case, pension/annuity would have begun only at the age of 60. If such a subscriber exited the scheme at 58, this would have been considered early exit (before attainment of 60 years) and corresponding rules would have applied.
PFRDA, the pension regulator, has sought to address these issues with the revised exit and withdrawal rules.
Revised Rules for Withdrawal from NPS
Partial withdrawal up to 25% of own contribution (excluding contribution from the employer) is allowed after 10 years for defined expenses. Defined expenses can be:
- Child higher education or marriage
- Construction/purchase of first house
- For treatment of 13 specified illnesses and any accidents or diseases of life threatening nature for self, spouse, children and dependent parents.
Please note contribution means only the principal amount i.e. your subscription amount (and not the returns on that corpus). Maximum three withdrawals are allowed with a minimum gap of 5 years between each withdrawal. The restriction on gap between withdrawals is not applicable in case of specified illnesses.
Specified illnesses are cancer, kidney failure (end state renal failure, primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, heart value surgery, stroke, myocardial infarction, coma, total blindness and paralysis.
Book Suggestion: Retire Rich, Invest Rs 40 a day (P.V.Subramanyam)
Revised Rules for Exit from NPS
You can see that the exit rules for Government and private sectors employees are different.
Please note in case of death of subscriber after purchase of annuity, the payout will governed as per the annuity contract. NPS or PFRDA will have no role to play.
For private sector employees/self employed, the exit rules are silent on treatment if the subscriber dies after retirement (and before purchase of annuity). We believe, in such a case, the entire wealth can be withdrawn as lumpsum by the nominee or legal heir. There will be no mandatory purchase of annuity. In case the subscriber dies before the withdrawal of lumpsum amount, the amount will have to be necessarily withdrawn by the nominee/legal heir. We hope this matter will be clarified soon.
Though we have tried to cover all the important aspects of new regulations under NPS, there are still a few sub-conditions which we have not covered. We wanted to keep the post easily comprehensible for your readers. In case, you want to read the regulations in detail, you can find the regulations here.
How do these rules benefit investors?
There is flexibility available to investors that they can use these funds in case of an emergency or an important life goal. PFRDA has capped the amount of withdrawals and limited the use of funds for specific purposes. Therefore, primary goal of NPS as a retirement product remains intact. This is a smart move by the regulator.
Additionally, there is a provision for proper exit (not premature) before the age of 60. So, if the retirement age at some organisation is less than 60 (say 58 years), the NPS subscriber can stop contributing at 58 and even opt for annuity/pension from the age of 58. Earlier, this was not possible. Every subscriber had to keep contributing till the age of 60. Any exit earlier than the age of 60 would have been considered premature exit and withdrawal rules had to be applied accordingly (mandated purchase of annuity/pension for 80% of amount). This change does away with this restriction.
There is an additional option for Corporate sector NPS subscribers (private sector employees/self employed). They can continue contributing to their NPS corpus even till the age of 70. This option was not available earlier. You could contribute only till the age of 60. So, if you feel you have not accumulated enough corpus for retirement (and have means to contribute to your NPS corpus), you can keep adding to your NPS corpus. Please note this option is not available to Government sector employees.
These revised rules provide a lot of flexibility to the subscribers/investors. They have been allowed to use their NPS corpus in cases of emergency, which is a welcome move. NPS, without doubt, is a better product after these rules. There is better clarity about exit rules too. However, since NPS is meant to be a retirement and pension product, it is advisable to dip into your NPS corpus only after you have exhausted all other options.
Does NPS become a good enough product to invest in?
We don’t think so. We have our reservations about NPS because of tax treatment of NPS proceeds. The greatest strength of NPS is its low cost structure. However, with the recent Bajpai Committee recommendations, even its low cost structure may be under threat. Though the recommendations have not yet been accepted by the pension regulator, we will keep an eye on this aspect on NPS. We will cover the recommendations in one of our subsequent posts.
The post was first published on July 28, 2015.
Following section was added on November 12, 2016
What are the documents required for Partial Withdrawal from NPS?
PFRDA, in a circular dated October 24, 2016, has listed out the documents required for partial withdrawal.
For Higher Education: Copy of Admission letter of the Institute along with fee schedule
For marriage of children: Self Declaration. Format for self-declaration is provided in the circular.
For purchase or construction of a residential house or flat in his or her own name or in a joint name with legally wedded spouse: Photocopy of title documents of the property, Approved plan and self-declaration OR Loan offer letter from a housing finance company or a bank and self-declaration. Format for self-declaration is provided in the circular.
For treatment of specified illnesses of the subscriber, his legally wedded spouse, children, including a legally adopted child or dependent parents: Certificate from doctor.