NPS Withdrawal Rule Change: Soon, Subscribers Can Withdraw Full Lifetime Contributions

National Pension System (NPS) may soon allow the subscribers to withdraw the full contributions. Pension Fund Regulatory and Development Authority (PFRDA) plans to introduce a new option for pensioners where they can withdraw their entire money at one go if the corpus is up to Rs 5 lakh, according to reports.

The increased threshold of Rs 5 lakh will offer better liquidity to a certain segment subscribers amid the second wave of the coronavirus pandemic. At present, beneficiaries can withdraw up to Rs 2 lakh from their NPS account. Beyond this limit, the pensioners can withdraw 60% of the contributions. At least 40% of the contributions has to be mandatorily parked in government approved annuities, according to the current rule.

The government-run investment scheme offers the subscribers the option to set the preferred allocation to different asset classes. There are two kinds of NPS accounts — Tier 1 and Tier 2. While the Tier 1 NPS account is strictly a pension account, the Tier 2 account is an investment account. At present, the returns of annuities average around 5.5%. With inflation and income tax on pension accumulation, the return for subscribers from annuities are often on the lower side.

The new rule will permit NPS holders to park their money where they get the better return. However, the regulatory body will provide the option of retaining a portion of subscribers pension money for investment in annuities or for investment by pension fund managers itself, according to reports.

NPS withdrawal rule

The NPS subscribers are allowed to withdraw their money from the account once they complete three years under some specified circumstances. However, for premature withdrawal, the amount can not exceed 25 per cent of contributions made by the NPS subscribers. The investors can withdraw partially for higher education of children, the marriage of children, for the purchase/construction of the residential house (in specified conditions) and for treatment of critical illnesses. NPS investors can make a partial withdrawal a maximum of three times during the entire tenure of subscription. It must be noted that these withdrawals are tax-free under Income Tax laws.

NPS account opening rule change

The pension regulator has recently permitted Points of Presence (POPs) and Central Record Keeping Agencies (CRAs) to on board new subscribers through the paper-less digital process. The NPS accounts opened digitally in CRA platform including eNPS, the soft copies of NPS subscribers’ applications will continue to be generated by CRAs. However, the NPS subscribers will no longer have to submit the physical application form to the respective CRAs, according to the new instructions. Subscribers will have options for authentication either through e-Sign or through OTP before the creation of Permanent Retirement Account Number (PRAN). This rule will also be applicable for NPS accounts opened through POPs.