Investors of National Pension Scheme (NPS) can now continue to subscribe in the pension fund till 70 years. The subscriber has to write to NPS trust or any intermediary at least 15 days before turning 60 or retiring. The subscriber will also have the option to defer the purchase of annuity for a maximum period of three years from the date of turning 60 or retiring.
The subscriber will have to pay the usual charges for central record-keeping agency, pension fund and trustee bank. The Pension Fund Regulatory and Development Authority (PFRDA) has issued a clarification which underlines that the entire set of exit and withdrawal conditions will be applicable on the accumulated pension wealth of the subscriber available in the Permanent Retirement Account Number (PRAN) as on the date of final exit from NPS including those contributions and investment income that have been contributed and accrued to the account beyond the age of 60 years of the age of superannuation.
The pension regulator has clarified that for a normal NPS account a Tier II account can also continue till the age of 70 years provided the Tier I account continues beyond 60 years age of the subscriber. A Tier II account allows a subscriber to withdraw money at any point of time without any restriction or penalty. Contributions towards the Tier II account can be made using the PRAN and a subscriber can choose between equity funds, government securities and fixed income instruments.
However, one does not get any tax benefit on the investment made in Tier II account as it does not have a locking period for funds which is there in case of Tier 1 account. Moreover, withdrawals from Tier II account are taxed. Withdrawals within a year of investment attract short-term capital tax while those after a year of depositing earn long-term capital tax.
The regulator has clarified that a subscriber contributing till the age of 70 years can avail all the facilities like CRA system, option to switch between the seven pension fund managers once a year without any charges. A subscriber can exit from NPS after giving due notice at any point of time after availing the benefit of extending beyond 60 years. However, the option of deferment of purchase of annuity would not be available to the subscribers who have voluntarily opted to continue to contribute beyond 60 years of age or superannuation.
NPS got a big push in 2015 Budget as the government has allowed tax benefit on investment of up to R50,000 a year in NPS under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C. In 2016 Budget, the finance minister has also made withdrawals from NPS on maturity tax-free up to 40% of the total corpus accumulated. Since 40% of the corpus is invested to buy annuity, in effect an investor has to pay tax on only 20% of the maturity proceeds now. Also, the amount received by the nominee, on the death of the employee at the time of closure of is exempt from tax.
A pure defined contribution pension product, NPS was introduced in 2004 for government employees and, in 2009, was extended to all private sector employees. For, non-government employees, up to 50% of the contribution can be invested in equities and the rest between corporate and government debt paper. The equity investment for the fund houses are done through index funds that replicate either S&P BSE Sensex or the CNX Nifty index. On turning 60, an investor can exit from the NPS but 40% of the pension wealth has to be utilised for purchase of an annuity. If an investor withdraws the corpus before reaching 60 years of age, he will have to invest 80% of the accumulated corpus for buying an annuity.
The NPS offers two approaches to invest subscriber’s money: active choice and auto choice. In the first, an individual can decide on the asset classes in which the contributed funds are to be invested and their percentages — equity (maximum of 50%), corporate debt and government debt. In auto choice or life-cycle fund, the investment of funds is done automatically based on the age profile of the subscriber, where the equity portion declines with increase in age.
