The Pension Fund Regulatory and Development Authority (PFRDA) has halved the mandatory requirement to purchase an annuity for non-government employees from 40% to 20%. Kurian Jose, chief executive officer, Tata Pension Fund Management, tells Saikat Neogi that this move will provide greater flexibility for those who may prefer managing their own investments rather than being locked into fixed annuity rates.
As PFRDA has allowed private sector subscribers to withdraw up to 80% of the accumulated corpus, how will it benefit them?
Non-government employees can now access up to 80% of their corpus as a lumpsum upon normal exit, a significant increase from the previous limit of 60%. This is an added option as the subscriber still can choose investment into annuity to the extent of 100%. The mandatory requirement to purchase an annuity has now been halved from 40% to 20%. This provides greater flexibility for those who may prefer managing their own investments rather than being locked into fixed annuity rates. For employees with a total corpus of up to Rs 8 lakh, the new rules allow for a 100% lumpsum withdrawal or other options like systematic unit redemption (SUR), effectively removing the annuity requirement entirely for these accounts. For those between Rs 8 lakh and Rs 12 lakh, employees can take up to Rs 6 lakh as a lumpsum and use the balance for systematic unit redemption (SUR) for a minimum of 6 years or annuity or other approved options. While the revised regulations increase the permissible withdrawal limit to 80%, clarity is still required regarding the tax treatment, as the current Income Tax laws provide a tax exemption for NPS lumpsum withdrawals only up to 60% of the total corpus.
How should young subscribers construct their NPS portfolio under Multi Scheme Framework (MSF)?
Under MSF, a young subscriber has much greater flexibility and ability to customise his investment. A prudent way to build a portfolio could be to invest into equity through the new MSF schemes (where up to 100% equity allocation is now permitted) to maximise long-term compounding, given a long investment horizon. Spread equity exposure across multiple ‘equity-heavy’ schemes under different pension fund managers (PFMs)—or different high-risk variants—to diversify fund-manager style and reduce concentration risk (the multi-fund, multi-style approach). Keep a smaller portion in moderate-risk or balanced MSF schemes (or older common schemes)—especially with some allocation in debt/government-sec—to smoothen market volatility.
Use MSF’s flexibility to rebalance over time. For example, start aggressively with mostly high-equity MSF funds when young, then gradually shift future contributions to moderate or balanced variants as one ages or as financial goals evolve.
What are the key caveats for young, aggressive investors?
While MSF allows 100% equity, higher equity means significantly higher volatility and hence this aggressive allocation must be balanced with risk tolerance. Vesting restriction: MSF schemes will have a minimum 15-year vesting period (as per current guidelines). Switching accumulated corpus between MSF schemes is restricted within that period (though switching to older common schemes may be allowed). This requires a long-term commitment to the initial scheme choice.
If a subscriber wants to diversify by holding more than one NPS scheme under a single PAN, how should they do that under MSF?
Under your existing PRAN, you can open multiple schemes (from one or more PFMs). You can also hold a mix of the new MSF schemes and the older common schemes simultaneously. One can also invest using active choice (selecting investments into equity, corporate bonds, government securities) as well as using lifecycle funds simultaneously, which adjust equity and debt proportions as per your age.
You can mix and match variants, e.g., a high-risk equity scheme from PFM-A, a moderate-risk balanced scheme from PFM-B, and maybe even a debt-oriented scheme from PFM-C. You benefit from PAN-based consolidated reporting, which means you can see both scheme-level and aggregate holdings and returns, simplifying oversight. This gives you the ability to structure your overall NPS portfolio in a modular manner—different schemes for different risk buckets or goals.
How can parking savings in an NPS Tier II account benefit investors seeking liquidity and better return potential—especially under MSF?
Investing in multiple MSF schemes under Tier II—gives you a liquid, diversified investment account rather than just a savings-like bucket. Since Tier II has no lock-in (unlike Tier I), you get liquidity—useful for short- to medium-term savings—while potentially earning better returns than traditional savings or fixed deposits, especially via equity-heavy MSF schemes. You also have the flexibility to redeploy or reallocate funds depending on market conditions or personal goals, without being locked into a single scheme or asset class. Fund management charges under MSF are significantly lower than other investment options.