With the Pension Fund Regulatory and Development Authority (PFRDA) expanding retirement payout options beyond traditional annuities, it has urged the government to extend tax-neutral treatment to these new products as well.
The regulator’s proposal aims to ensure that investors are not penalised for choosing alternatives that may better suit their financial needs and risk profiles.
Under current income tax provisions, 60% of withdrawals from the National Pension System (NPS) at retirement are tax-free. In addition, Section 80CCD(5) exempts the remaining 40% of the corpus that is mandatorily used to purchase an annuity from being taxed at the time of investment.
When an individual exits the NPS at the age of 60, at least 40% of the accumulated corpus in the government sector and 20% in the non-government sector must be utilised to buy an annuity from a PFRDA-approved insurer. This entire amount is exempt from tax at the point of purchase.
Beyond Annuities
However, feedback from subscribers suggests growing reluctance to invest in annuities, largely due to relatively low returns and limited flexibility. In response, PFRDA has proposed additional pension payout products, including systematic withdrawal plans (SWPs) and unit redemptions, alongside annuities.
“Until now, annuities have dominated. However, evidence shows that systematic withdrawals and other payout structures within NPS can generate higher long-term returns. We are working toward offering multiple payout options, giving retirees flexibility based on risk appetite and life expectancy,” PFRDA chairman Sivasubramanian Ramann told FE.
Closing the Tax Gap
“We seek tax neutrality across all pension payout products. The same tax treatment currently given to annuities under Section 80CCD(5) should be extended to other forms of pension withdrawals. The objective is simple: provide choice without creating tax disadvantages,” he said, confirming that the regulator has made a formal representation to the government ahead of the Budget.
Recent changes in exit norms already allow private-sector subscribers to reduce the mandatory annuity portion to 20%, enabling withdrawals of up to 80% of the corpus, subject to tax. If tax parity is extended to SWPs, a retiree could split payouts—say, 20% annuity and 20% SWP—without any tax liability, significantly enhancing flexibility and retirement outcomes.