For those looking to join NPS after age 65, the objective should not be only to save tax but to create a corpus to supplement pension during the retired years.
By Anil Chopra
The good news is that now senior citizens above age 65 (up to 70 years)are also allowed to open a National Pension System (NPS) account. Earlier, Pension Fund Regulatory and Development Authority (PFRDA) had increased the maximum age of joining under NPS from 60 years to 65 years of age. Now, any Indian Citizen, resident or non-resident and Overseas Citizen of India (OCI) between the age of 65-70 years can also join NPS and continue or defer their NPS Account up to the age of 75 years.
Going forward, anyone between the age of 18 and 70 years may open a NPS account. Those Subscribers who have earlier closed their NPS Accounts are permitted to open a new NPS Account as per increased age eligibility norms.
The new rules regarding the entry age stand to benefit the senior citizens especially those who wanted to open the account and save for their post retirement needs. By investing in NPS, they can now plan for a regular pension till their lifetime. The amount invested in NPS also comes with tax benefits and helps the senior citizens save tax. On opening an NPS account, a Tier I account gets opened automatically, while the Tier II account can be opened to keep savings liquid as it comes with no lock-in period.
Even during retirement, one needs to allocate money into equities keeping life expectancy and inflation into consideration. NPS gives you the option to allocate funds between equity & debt options like Govt securities & Corporate Bonds to manage inflation during retirement. Those joining NPS beyond the age of 65 years, can exercise the choice of PF ( Pension Fund) and Asset Allocation with the maximum equity exposure of 15% and 50% under Auto and Active Choice respectively.
The exit conditions for subscribers joining NPS beyond the age of 65 years will be as under:
a. Normal Exit will be after 3 years : If someone joins NPS after age 65, the minimum lock-in period will be 3 years. However, withdrawing the entire corpus is not allowed and only up to 60 per cent tax free withdrawal can be made by the subscriber. On balance 40 per cent, compulsory pension or annuity will be paid by a life insurance company. If the corpus is equal to or less than Rs 5 lakh, the Subscriber may opt to withdraw the entire accumulated pension wealth in lump sum. In that case , 60% of the withdrawal amount will be considered Tax free and balance 40% will be added in taxable income of the subscriber.
b. Exit before completion of 3 years will be treated as Premature Exit : In case if someone joining NPS after age 65 wants to withdraw before competition of 3 years, up to 20 per cent tax free withdrawal will only be allowed. On balance compulsory lifetime pension or annuity. If the corpus is equal to or less than Rs 2.5 lakh, the subscriber may opt to withdraw the entire accumulated pension wealth in lump sum. Here , again 60% amount will be tax free and balance taxable.
There are tax-benefits for the NPS subscribers as well. The contribution made in NPS not only qualifies for deduction under Section 80 CCD (1) up to a limit of Rs 1.5 lakh per financial year but also it comes with additional tax benefit under section 80CCD(1B) up to Rs 50,000 a financial year. For those joining NPS after the age of 65, the advantage is in terms of better annuity rates as compared to younger individuals. The annuity rates for someone age 65 is better than annuity rates for someone age 55. For those looking to join NPS after age 65, the objective should not be to save only tax but to create a corpus to supplement pension during the retired years.
(The author is Group Director – Financial Wellbeing, Bajaj Capital)