In a significant move aimed at providing greater flexibility to retirement planning, the Pension Fund Regulatory and Development Authority (PFRDA) has announced a major overhaul of the National Pension System (NPS). The changes, which primarily benefit subscribers from the private sector, include a higher lump-sum withdrawal limit and an extended investment horizon.
Key Changes in Withdrawal and Age Limits
The most notable change is the increase in the permissible lump-sum withdrawal limit at the time of exit. Private sector NPS subscribers can now withdraw up to 80% of their accumulated corpus, a substantial jump from the earlier limit of 60%. The remaining 20% must be used to purchase an annuity plan, which provides a regular pension income.
Furthermore, the regulator has extended the maximum age limit for staying invested in the NPS. Subscribers now have the option to remain in the pension scheme until they turn 85 years old, a full decade more than the previous ceiling of 75 years. This allows for a longer accumulation phase and defers the need to purchase an annuity.
Enhanced Flexibility with Systematic Withdrawals
PFRDA has also introduced and reiterated mechanisms for periodic income. The regulator has formally allowed systematic unit redemption, which functions similarly to systematic withdrawal plans (SWPs) offered by mutual funds. This facility, however, can only be availed from the 80% portion earmarked for lump-sum withdrawal, not from the annuity component.
Additionally, the rules for partial withdrawals during the accumulation phase have been relaxed. Subscribers are now permitted four partial withdrawals until they reach the age of 60, up from three allowed earlier. These withdrawals can be made for specific financial needs such as children's higher education, marriage expenses, or the purchase or construction of a house.
Tax Clarity and Revised Full-Withdrawal Limits
A critical area that requires clarification is the tax treatment of the enhanced withdrawal. Currently, only 60% of the total corpus withdrawn from NPS is tax-exempt. With the new 80% limit, there is a need for the government to amend the Income Tax Act to extend the tax-free benefit to the additional 20%. Industry experts anticipate a corresponding amendment in the law.
The limits for full withdrawal have also been revised upwards. Subscribers with a total corpus of up to Rs 8 lakh can now withdraw the entire amount, compared to the earlier threshold of Rs 5 lakh. This change is reportedly because annuity providers typically require a minimum purchase value of around Rs 2 lakh to offer a viable plan.
For those with a corpus between Rs 8 lakh and Rs 12 lakh, new options are available. They can choose to withdraw a lump sum of up to Rs 6 lakh, or they can opt for periodic payouts through the systematic lump sum withdrawal or systematic unit redemption facilities.
Eligibility and Impact
These revised withdrawal limits are applicable to private sector subscribers who have been part of the NPS for 15 years or more, or are retiring. The suite of changes is designed to make the NPS a more attractive and flexible retirement planning tool for individuals in the private sector, bringing its features closer to the liquidity and control often desired from long-term investments.
