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What are the Rules for Exit From NPS?

National Pension System offers a variety of withdrawal options, including lump sum withdrawals and annuity payments.

  • 5,358 Views | Updated on: Jun 13, 2024

The National Pension System (NPS) is a government-sponsored retirement savings scheme in India that aims to provide financial security during individuals’ post-retirement years. With its flexible contribution options and professionally managed investment choices, the NPS has gained popularity among employees from the public and private sectors. However, understanding the rules and regulations governing the exit from the NPS is essential to make well-informed decisions.

The National Pension System is one of the most common and effective retirement plans in India. This investing tool was established keeping in mind - people’s desire to spend their senior years in leisure and contentment without worrying about where the money would come from to finance their dream retirement lifestyle.

Understanding NPS and Its Key Features

The Indian government has a National Pension System (NPS) for its citizens who contribute to it during their working lives to secure a considerable sum of money that would allow them to lead a safe, secure, and fulfilling life after retirement.

NPS comes with unique features, which makes it an excellent option for retirement corpus:

Voluntary

You can join NPS voluntarily at any time between the ages of 18 and 60.

Tier I and Tier II accounts

You can open two types of accounts under NPS: Tier I and Tier II. Tier I is a mandatory account, while Tier II is a voluntary account.

Tax benefits

Contributions made to NPS are eligible for tax deductions under Section 80C of the ITA (Income Tax Act) 1962.

Flexibility

You can choose your investment options and make contributions at your convenience.

Portability

Your NPS account is portable, which means you can continue contributing to it even if you change your job or location.

Benefits of NPS

The National Pension System offers various benefits that attract individuals to invest in it. It helps them prepare for the retirement.

Tax-Efficient Retirement Savings

NPS offers attractive tax benefits on contributions and returns.

Market-Linked Returns

NPS offers a variety of investment options, allowing you to earn market-linked returns.

Flexibility

NPS offers flexible contribution options and investment choices.

Portability

Your NPS account is portable, allowing you to continue contributing even if you change jobs or location.

Professional Management of Funds

Professional fund managers manage NPS funds.

Who should consider NPS?

NPS is a good retirement savings option for anyone who wants to:

Save Taxes on their Retirement Savings

NPS offers attractive tax benefits on both contributions and returns. Contributions made to NPS are eligible for deduction under Section 80C of the Income Tax Act. This means that you can reduce your taxable income by the amount you contribute to NPS. Additionally, the returns earned on your NPS investments are not taxable until you withdraw them from the scheme at retirement.

Earn Market-linked Returns

NPS offers a variety of investment options, allowing you to choose the level of risk that is right for you. These options include equity funds, debt funds, and alternative investment funds. Equity funds can potentially generate higher returns, but they also carry more risk. Debt funds are generally less risky, but they also tend to generate lower returns. Alternative investment funds can offer diversification and potentially enhance returns but may also carry higher risk.

Have a Flexible and Portable Retirement Savings Plan

NPS offers a flexible contribution schedule, allowing you to contribute as much or as little as you can afford. You can also choose to make regular contributions or to make one-time contributions. Additionally, your NPS account is portable, so you can continue contributing to it even if you change jobs or location. This makes NPS a good option for people who are likely to change jobs or who live in different parts of the country during their working years.

Exiting National Pension System

Sometimes, people want to or have to exit from the National Pension Scheme based on their circumstances, wishes, or requirements, and there are provisions for that. Once they have made their exit decision, the Pension Fund Regulatory and Development Authority (PFRDA) provides a set of rules that allow them to do the same by following a certain procedure. Here are certain scenarios where exiting from the NPS system can be considered:

For Government & Private Sector Employees

  • The rules apply whether one works for the government or the private sector. They should invest at least 40% of their yearly salary into a pension plan, with the choice of receiving the remainder in one lump sum. For this, an NPS calculator can be used to figure out the plan cost.
  • If a person’s total pension is less than ₹2 lakhs, they may choose to withdraw the full amount.
  • One can defer the lump sum withdrawal until they reach the age of 70

Voluntary Retirement By Corporate Sector Employees

  • For a government employee who takes voluntary retirement, a minimum of 80% of the funds must be put into an annuity.
  • If an individual’s cumulative pension is less than ₹1 lakh, they can opt for withdrawing the entire sum.

Death of a Corporate Employee

In the case of a corporate employee’s death, the nominee is eligible for NPS death benefits and has the option of withdrawing the entire account balance as a lump payment.

Rules For Partial Withdrawal From NPS

After ten years, one can partially withdraw from their NPS account. In reality, NPS participants are allowed three withdrawals with a five-year interval between each one of them.

Contributors have the option of withdrawing up to 25% of their funds. Furthermore, one can only withdraw a portion of the principal amount. As a result, they will not be free to withdraw any income from their NPS account.

NPS Rules for Premature Withdrawal

Premature withdrawal from the National Pension Scheme (NPS) is permitted under certain conditions. These conditions are designed to ensure that NPS remains a long-term retirement savings scheme and that premature withdrawals do not undermine its primary purpose.

Tier I Account

Before 2011, clients were locked into a contract that extended till they reached the age of 60. On the other hand, existing NPS premature departure criteria allow participants to exit via reimbursable advances before completing 15 years of service.

Additionally, after 25 years of service, one may be eligible to receive up to 50% of their NPS deposit. Withdrawals are only authorized for life-threatening illnesses, other crises, or life events requiring financial help.

Tier II Account

For individuals who have invested in a Tier II account, NPS allows limitless withdrawals. As a result, the NPS account functions similarly to a savings account.

However, one should be mindful that the withdrawal procedure might be time-consuming due to the restricted number of Points of Presence (PoP).

NPS Withdrawal: New Rules

In a recent move, the Pension Fund Regulatory and Development Authority (PFRDA) has implemented significant changes to NPS withdrawals for subscribers. These changes are aimed at streamlining the withdrawal process and ensuring timely disbursement of NPS funds to subscribers.

Key Highlights of the Changes

These changes are a welcome step towards enhancing the overall NPS experience for subscribers. They will facilitate smoother withdrawals and give subscribers more control over their retirement corpus. Here are the highlights of these changes:

Instant Bank Account Verification

To ensure timely credit of NPS funds, instant bank account verification has been made mandatory. This will help avoid delays in processing withdrawal requests.

Enhanced SLW Flexibility

Subscribers can now withdraw up to 60% of their pension corpus through the Systematic Lump Sum Withdrawal (SLW) facility. This facility allows for withdrawals on a monthly, quarterly, or half-yearly basis, providing subscribers with greater flexibility in managing their retirement income.

Also note that the remaining 40% of the pension corpus must be invested in an annuity plan to ensure a regular stream of income during retirement.

Annuity Purchase with NPS Withdrawal

Upon withdrawal from the National Pension Scheme (NPS), a portion of the accumulated corpus must be mandatorily invested in an annuity plan to ensure a regular stream of income during retirement. The annuity purchase requirement varies depending on the type of withdrawal:

Normal Exit (at age 60 or upon superannuation)

  • Annuity Requirement: At least 40% of the accumulated corpus must be invested in an annuity plan.
  • Lump Sum Withdrawal: The remaining 60% can be withdrawn as a lump sum.

Premature Exit (before age 60)

  • Annuity Requirement: At least 80% of the accumulated corpus must be invested in an annuity plan.
  • Lump Sum Withdrawal: The remaining 20% can be withdrawn as a lump sum.

Reasons for Mandatory Annuity Purchase

The mandatory annuity purchase requirement serves several purposes:

Financial Security

It ensures a regular income stream for retirees, providing financial security during their retirement years.

Retirement Income Stability

It protects retirees from market fluctuations and ensures a steady income, regardless of market conditions.

Longevity Risk Mitigation

It mitigates the risk of outliving one’s savings, ensuring a lifetime income stream.

Annuity Options for NPS Withdrawal

NPS subscribers have the flexibility to choose from a variety of annuity options offered by empaneled insurance providers. These options include:

Life Annuity

Provides a regular income for the annuitant’s lifetime.

Joint Life Annuity

Provides a regular income for both the annuitant and their spouse, even after the annuitant’s death.

Annuity with Return of Purchase Price

Provides a regular income for the annuitant’s lifetime, and upon the annuitant’s death, the purchase price is returned to the nominee.

Factors to Consider When Choosing an Annuity

When selecting an annuity option, NPS subscribers should consider several factors:

Annuity Type

Choose the annuity type that aligns with their financial needs and risk tolerance.

Annuity Provider

Evaluate the reputation and financial strength of the annuity provider.

Annuity Features

Carefully review the annuity’s features, such as annuity rates, terms and conditions, and options for survivors.

How to Request Investment Withdrawals?

The application form is available on the official website of NSDL, and you can leave NPS digitally by downloading and completing it. You need to be aware that there are three different NPS forms available that can be used to process exit in the following situations:

  • Withdrawal in part
  • Early NPS termination
  • Following maturity, withdrawal

For the death of a subscriber who works for the government, a unique NPS exit form is applicable.

Here is how to start a withdrawal request to leave the NPS program:

Step 1. Enter your PRAN and password to access the CRA system.

Step 2. Click the “Exit from NPS” option. Click “Initiate Withdrawal Request” after that.

Step 3. Fill out the required information, including your name, date of birth, gender, residence, PAN number, nominee information, annuity service provider, and annuity scheme preferences.

Step 4. Print this withdrawal form out. Affix a photo to it and place a sign across it. Additionally, you must sign the declaration in opposition.

Step 5. Then, deliver the paperwork and your KYC records to the appropriate Nodal Office (for government workers) or PoP (for corporate employees).

How to Close an NPS Account?

An NPS account can be closed offline or online. Let us first go over how to terminate an NPS account online:

Step 1: Start an exit request by entering your login information into the CRA system.

Step 2: The website shows you messages about OTP authentication and request authorization. At this point, the corpus should be set aside for annuity/lump sum, nomination information, etc.

Step 3: Upload scanned copies of your KYC documents.

Step 4: Complete the authentication process by entering an OTP produced on your registered contact number and email address.

You can also retire voluntarily or take a premature exit under the NPS. You should be aware that you must have kept up with your NPS account for at least ten years to qualify.

Additionally, according to NPS exit requirements, you must put at least 80% of the money into an annuity. However, if your total pension is less than ₹1 lakh, you may withdraw the entire sum.

Tax Implications of Premature NPS Withdrawal

Premature withdrawals from NPS are subject to taxation. The lump sum withdrawal of 20% is taxable as per the subscriber’s income tax slab. The mandatory investment of 80% in an annuity plan is also taxable as per the subscriber’s income tax slab in the year of payout.

Alternative to Premature NPS Withdrawal

If you are facing financial difficulties and considering premature withdrawal from NPS, you should explore alternative options first. These may include:

Liquidating Other Investments

Consider liquidating other investments, such as fixed deposits or mutual funds, before resorting to withdrawing from NPS.

Taking a Loan

If you need funds for a specific purpose, such as a child’s education or medical expenses, consider taking a loan instead of withdrawing from NPS.

Seeking Financial Assistance

If you are facing severe financial hardship, seek financial assistance from government agencies or non-profit organizations.

Premature withdrawal from NPS should be a last resort. NPS is a long-term retirement savings scheme, and premature withdrawals can significantly impact your retirement corpus.

Wrapping Up

The National Pension System (NPS) offers a flexible and portable retirement savings option for individuals seeking a secure and fulfilling retirement life. With its attractive tax benefits, market-linked returns, and professional fund management, NPS stands out as a valuable tool for planning a financially secure future. It also offers easy and uncomplicated exit options if you want to exit from the scheme. You must evaluate the consequences of exiting from NPS before deciding and considering your options for retirement.

Key Takeaways

  • NPS is a voluntary retirement savings scheme that allows you to save for your future.
  • It offers a variety of investment options to suit your risk tolerance and investment goals.
  • Your NPS account is portable, which means you can continue contributing to it even if you change jobs or location.
  • There are different rules for exiting NPS depending on your age and the type of withdrawal you want to make.
  • Premature withdrawal from NPS should be a last resort, as it can significantly impact your retirement corpus.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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