In order to provide more clarity and better understanding of various provisions of deferment and continuation of National Pension System (NPS) Tier II accounts, the Pension Fund Regulatory and Development Authority (PFRDA) has issued some operational guidelines.
NPS Tier II account
In Tier II account, a subscriber can withdraw money whenever he wants without any limit. The investment will earn market-linked returns—combination of equity, government securities and corporate debt. But to open a Tier II account, one has to open a Tier I account first. Unlike Tier I account, there is no tax deduction benefit under Section 80C of the Income Tax Act for Tier II account and the returns from this account are added to one’s income and taxed as per slab. This is because NPS Tier II account does not have a locking period for funds, which is there in Tier 1 account. The redemption amount will vary depending upon the applicable NAV at the time of redemption and the money is transferred from trustee’s bank account to subscriber’s account in three working days.
A pure defined contribution pension product, NPS was introduced in 2004 for government employees and, in 2009, was extended to all private sector employees. 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, 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.
Defer lump sum
The pension regulator had earlier clarified that for a normal NPS account a Tier II account can also continue till the age of 70 years provided the subscriber continues with the Tier I account beyond the age of 60. The current circular clarifies that subscriber cannot defer lump sum in the case of pre-mature exit from the system. As per the exit and withdrawal system, the central record keeping agency (CRA) intimates the subscriber six months before the date of superannuation or age of 60 years. It initiates the process of completing all the formalities related to exit, including exercising the option of deferment of lump sum and annuity.
The minimum 40% of the accumulated pension wealth available in the Permanent Retirement Account as on the date of final exit after 60 years of age including contributions and investment income will be utilised to purchase annuity and the remaining amount will be paid as lump sum to the subscriber. In case of death of the subscriber, exit and withdrawal conditions as specified in the regulations will apply.
A subscriber can exit from NPS irrespective of the period of contribution indicated by him at the time of opening the account. However, he cannot opt for deferment of lump sum and annuity after the exit before the age of 60 years.
A subscriber who has joined the NPS system between the age of 60 and 65 years cannot avail the option of deferment of lump sum and annuity as he can continue with NPS only till he is 70 years. If the subscriber exits the NPS system before continuing minimum three years from the date of joining, exit will be treated as pre-mature exit and after three years it will be treated as normal exit.
Continuing Tier I and Tier II accounts
The Tier II account can continue along with the Tier I account when a subscriber opts for deferment of lump sum and annuity both after the age of 60 years or superannuation. All the facilities other than one way switch available to Tier II account before the age of 60 should continue till closure of Tier I—withdrawal or lump sum) or as decided by the subscriber to close the Tier II account.