National Pension Scheme – The new norms


The National Pension Scheme (NPS) is a voluntary pension scheme launched by the government of India. Investors can regularly contribute in the scheme during their work life, withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

The Pension Fund Regulatory and Development Authority (PFRDA) recently recommended some changes in the NPS norms related to withdrawal, investment and tax benefits among others. These changes are expected to make the scheme more attractive to the investors. The recommendations are likely to be effective from the new financial year i.e. 1 April 2019. The changes recommended are as follows-

1) Tax-free withdrawal

The government has made NPS withdrawal fully exempt from tax. NPS allows its subscribers to withdraw 60% of the corpus on maturity while the balance 40% needs to be invested in an annuity plan. Earlier only 40% of the withdrawn amount was tax free, while the remaining 20% was taxed. This has brought NPS at par with other retirement products such as the employee provident fund (EPF) and public provident fund (PPF). The income from the corpus in the annuity plan will remain taxable. The changes will apply to both government and private subscribers.

The government also approved that the contribution by government employees in the Tier-II funds of NPS will be eligible for deduction under Section 80C up to Rs.1.5 lakhs, provided there is a lock-in period of 3 years. This benefit is also expected to be also extended to private subscribers.

2) Higher government contribution

The government’s contribution towards NPS for central government employees has been increased to 14% of the basic salary from the current 10%. Employees who joined central government services on or after 1 January 2004 are enrolled under NPS and they will be benefited from the higher contribution by the government. The minimum employee contribution will remain unchanged at 10%.

3) Higher equity option

Investors will now have the advantage to decide their own investment pattern. If they choose the active option of NPS, they will have the choice to pick the mix amongst asset classes such as equities, corporate debt, government securities and alternative investment funds. With the new changes, investors can now put 75% of their money in equity funds if they are below 50 years of age. This was earlier capped at 50%. Once they cross 50 years of age, the equity exposure will be gradually reduced to 50% by the time of retirement. Employees can also decide to convert their entire corpus into annuity at the time of retirement. With this will be able to get higher percentage of their last drawn salary as pension.

4) Extension of exit age

Earlier the subscribers needed to inform at least 15 days prior to attaining 60 years of age or superannuation if they wished to extend the exit age up to 70 years. They can now obtain extension till 180 days after attaining 60 years of age or superannuation.

5) Partial withdrawal

The government has relaxed the rules for partial withdrawal. Partial withdrawal from Tier-I account has been reduced from 10 years to 3 years from the date of joining. Investors can now make three partial withdrawals not exceeding 25% of the contribution made. This does not include contribution made by the employer.

Apart from these, the government has also approved payment of compensation for non-deposit or delayed deposit of NPS contribution during 2004 to 2012 for central government employees.

Mushtaq Kazi
Mushtaq is the co-founder of Mushtaq has had corporate stints with Kotak Securities & IIFL group. He holds an MBA degree from Pune University.
His interests include cooking & gardening. When he is not cooking or gardening, he is writing.

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