In order to make the National Pension System (NPS) more attractive, the pension-fund regulator has enabled subscribers to continue the Permanent Retirement Account Number (PRAN) in case of a premature exit. This will help many subscribers to continue with their existing PRAN, preserve the corpus and accumulate money for retirement.
Under NPS, a subscriber can opt for a premature exit. Any exit, before completion of three years will be treated as premature exit. In such a case, 20% of the accumulated corpus can be withdrawn as lumpsum and the rest (80%) is invested with a life insurance company empanelled by Pension Fund Regulatory and Development Authority (PFRDA) for buying annuity. However, in case the accumulated corpus at the time of exit is equal or less than Rs 1 lakh, the subscriber will have the option to withdraw the entire corpus in lump sum. In case of death of the subscriber, the entire corpus will be paid to the nominee of the subscriber.
The regulator has highlighted that there are instances where subscribers, including government employees, have withdrawn the 20% of the corpus on premature exit, but have not yet bought any annuity plan with the remaining corpus and the money is invested in their PRAN.
Such subscribers can now continue their NPS account by depositing the entire amount (20%) withdrawn, according to a PFRDA circular. The money has to be deposited in one lumpsum into their account. In case of difficulty in paying the lumpsum at once, the subscriber can close the NPS account, buy an annuity out of the remaining corpus (80%) and open a new NPS account.
Accumulation of corpus
A pure defined contribution pension product, NPS was introduced in 2004 for government employees. It was extended to all private sector employees in 2009. The NPS offers two approaches to invest subscriber’s money: active choice and auto choice. Private sector subscribers can invest up to 75% in equity under the active choice option. One can opt for the life cycle fund under auto choice where the equity exposure comes down as one grows older. There are three life cycle funds: moderate life cycle fund (with 50% equity cap), aggressive life cycle fund (with 75% equity cap) and conservative life cycle fund (with cap on equity at 25%.)
A subscriber of NPS gets tax benefit up to Rs 1.5 lakh under Section 80 of the Income Tax Act, 1961 for yearly contribution. Additionally, the subscriber gets a tax deduction of up to Rs 50,000 under Section 80CCD 1(B) of the I-T Act. After maturity, 60% of the maturity corpus withdrawn is tax free and even the remaining 40% of the corpus, which has to be compulsorily used to buy annuity at retirement, is tax-exempt. Even partial withdrawal from NPS for emergency purposes is tax-exempt under Section 12B of the Income-Tax Act. So, NPS is tax-exempt at all the three stages—investment, accumulation and withdrawal and is the most tax-efficient financial product to build one’s nest egg.
Annuity payout in NPS
If an NPS subscriber retires at the age of 60, he can withdraw 60% of the accumulated corpus as lumpsun and has to mandatorily buy an annuity plan for the 40% of the remaining corpus. It is mandatory for the NPS subscribers to purchase an annuity product from an empanelled life insurance company known as annuity service provider (ASP). The subscriber selects the ASP at the time of submitting the withdrawal request or after the payment of lumpsum withdrawal.
There are various types of annuity options such as pension payable for life at a uniform rate, annuity for life with return of purchase price on death of the annuitant, annuity payable for life increasing at a simple rate of 3% per annum, annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant, annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant, etc.