New norms on partial withdrawal from NPS Tier-I account are set to make the scheme more attractive
The PFRDA has allowed partial withdrawal, up to 25% of contributions, from the National Pension System (NPS) Tier-I account for certain specified circumstances if one has stayed subscribed for 10 years. These could be for children’s higher education or marriage, construction or purchase of first house, and treatment of critical illness for self, spouse, children or dependent parents.
The Pension Fund Regulatory and Development Authority (PFRDA) notification has defined 13 critical illnesses, such as cancer, kidney failure and heart surgery, for which a subscriber can make partial withdrawal.
Any life-threatening accident also qualifies for a partial withdrawal from NPS as does buying or constructing a house. However, partial withdrawal won’t be allowed for buying a second property.
A subscriber can withdraw from NPS only three times during the entire tenure and the gap between each withdrawal has to be at least five years.
Like earlier, subscribers of Tier-II account can withdraw the accumulated wealth, either in full or part, at any time and there will be no limit on such withdrawals till the account has sufficient amount of accumulated pension wealth to take care of the applicable charges.
The notification has stated that funds in Tier-I account will not be liable to seizure or attachment by any court at the instance of a creditor.
Analysts say the new norms on partial withdrawal would make NPS attractive as many investors stayed away from it because of liquidity issues.
Moreover, incentives offered in this year’s Budget will be a big pull, especially for those in the higher tax bracket. 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.
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.
The government has, however, not made investments in NPS tax-free at the time of withdrawal. While the investments and interest accumulations with not be taxed, the money would be taxable at the time of withdrawal.
Products like PPF and EPF are tax-exempt at all three stages — investment, accumulation and withdrawal.
Assets under management (AUM) of NPS increased from R48,105 crore as on March 31, 2014, to R86,532 crore as on May 31, 2015. The number of subscribers rose from 65,06,180 in March 2014 to 91,68,724 as on May 31, 2015, which includes Central and state government employees.
At present, there are eight pension fund managers, but only three of them — LIC Pension Fund, SBI Pension Fund, and UTI Retirement Solutions — are allowed to manage the pension corpus of government employees.
Exit from the fund
At the age of 60, the subscriber will have to put aside at least 40% of the accumulated pension wealth to buy annuity for a monthly or any other periodical pension. The balance will be paid to him as a lump sum. If the accumulated pension wealth of the subscriber is less than R2 lakh, he will have the option to withdraw the entire accumulated pension wealth without buying any annuity.
For Swavalamban subscribers, if the accumulated pension wealth is less than R1 lakh, the subscriber can withdraw the entire fund without buying any annuity.
If the subscriber dies before 60, the accumulated pension wealth will be paid to the nominee or the legal heir. There will not be any condition of mandatory purchase of annuity or monthly pension. However, the nominee of the deceased subscriber will have the option to purchase any of the annuities being offered by empanelled life insurers with PFRDA.
Once an annuity is purchased, the option of cancellation and re-investment with another annuity service provider or in another annuity scheme will not be allowed unless it is done within the free-look period.
The pension regulator has also given the option of a default annuity provider and annuity scheme for the benefit of subscribers exiting from NPS.
Analysts say while they will provide a steady income stream, the annuities market is still underdeveloped and the returns on offer are not very attractive.
Extending the fund
A subscriber can continue to subscribe beyond the age of 60, till 70 years, by writing to the NPS trust or any intermediary at least 15 days before turning 60 or retiring. The subscriber will 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.
* PFRDA defines 13 critical illnesses, such as cancer, kidney failure and heart surgery, for which a subscriber
can make partial withdrawal
* Any life-threatening accident qualifies for a partial withdrawal from NPS as does buying or constructing a house
* Partial withdrawal not allowed for buying a second property
* Withdrawal from NPS allowed only three times during the tenure
* Gap between each withdrawal has to be at least five years
* Funds in Tier-I account not liable to seizure or attachment by any court at the instance of a creditor
* Subscribers of Tier-II account can withdraw the accumulated wealth, either in full or part, at any time
* There will be no limit on such withdrawals till the account has sufficient amount of accumulated pension wealth to take care of the applicable charges
* The new norms on partial withdrawal would make NPS attractive as many investors stayed away from it because of liquidity issues