Permitting complete withdrawals of the pension corpus of up to Rs 5 lakh or less without the necessity of purchasing an annuity, the PFRDA (Pension Fund Regulatory and Development Authority) notified the relaxation of existing norms in order to allow for increased market liquidity and investor participation.
“NPS subscribers with an accumulated pension wealth in the Permanent Retirement Account equal to or less than a sum of Rs 5 lakh, or a limit as specified by the Authority shall have the option to withdraw the entire accumulated pension wealth without purchasing an annuity and upon such exercise of this option, the right of such subscriber to receive any pension or other amount under the National Pension System or from the government or employer, shall extinguish”, the announcement read.
This is a marked shift from the current complete withdrawal limit of Rs 2 lakh. For any amount beyond this or on the condition that the beneficiary attains the age of sixty, only 60% of the contributions can be utilized, with 40% of the fund earmarked for government-mandated annuity insurance plans. This also allows for increased investments and better returns, given that annuities are known to deliver returns on the lower end of the scale, with the current range being merely around 5-5.5%.
The pension regulator also raised the maximum NPS entry age from 65 years to 70 years, pushing the exit age limit to 75 years, allowing for more people to participate in the government-sponsored pension scheme. The premature withdrawal limit (lumpsum) was also raised to Rs 2.5 lakhs from the previous ceiling of Rs 1 lakh.What is NPS?
Launched in 2004, NPS offers its subscribers the facility to withdraw funds post completion of three years of service, where there is a premature withdrawal limit of around 25% of the entire corpus. Tax-free partial withdrawals are also permitted for various conditions like education and marriage of children, house construction, and more, which cannot exceed more than three times during the entire tenure.
With Tier 1 NPS account being a pension account and Tier 2 NPS account allowing for investments, it also offers scope for asset allocation to the investor.
As of September 30, 2020, the state government accounted for the maximum number of subscribers, around 48.97 lakhs. The central government registered a Y-O-Y increase of 5.13%, to 21.3 lakhs. The maximum Y-O-Y growth of 19.33% was seen in the corporate segment, with around 10 lakh subscribers.
“Given the immense tax benefits NPS comes with and the recent relaxations, the scheme now has room for more people who’ve joined the pension system late in their working lives to avail its benefits”, said Himanshi Gupta, a Delhi-based financial planner. Notably, existing insurance businesses can now sell NPS in a bid to widen the coverage of this pension scheme.
NPS has seen a major rise in the number of corporate subscribers over the years, which has an AUM (Assets under Management) of Rs 50,000 crores as of 30th September 2020. With a Y-O-Y growth of 40%, this stands tall over the annual AUM growth of the central government at 28.79% and state government at 33.94%.