NPS Withdrawal Rule Change: Know What It Means to the NPS Subscribers

What Is the SLW Facility?

The National Pension System (NPS) is a government-backed retirement scheme governed by the Pension Fund Regulatory and Development Authority (PFRDA). Demonstrating commendable long-term market-linked returns, the NPS has outperformed other comparable retirement options, such as the Public Provident Fund (PPF) and the Employees Provident Fund (EPF).

Until now, NPS subscribers have been able to withdraw 60% of their accumulated funds as a tax-free lump sum after retiring, and the remaining 40% needs to be allocated for annuity.

Protean CRA has introduced the Systematic Lumpsum Withdrawal (SLW) facility for NPS subscribers. Through the SLW facility, when exiting due to superannuation, the lump sum corpus can be withdrawn gradually. Subscribers have the flexibility to withdraw their preferred amount systematically at regular intervals, similar to the Systematic Withdrawal Plan (SWP) offered in Mutual Funds.

What Are the Key Features of the SLW Facility?

1. It can be opted for upon reaching the Superannuation (Retirement) Exit stage.

2. Applicable exclusively to the lump sum portion of the NPS corpus.

3. Offers the choice of monthly, quarterly, half-yearly, and yearly frequency.

What Is the New NPS Withdrawal Rule Change?

NPS subscribers were initially able to withdraw 60% of their accumulated funds as a tax-free lump sum after retiring. However, there is now a change that allows them to withdraw up to 60% of their pension corpus periodically once they reach the age of 60. Subscribers are allowed to withdraw these funds systematically until the age of 75. It provides flexibility for subscribers to choose the frequency of post-retirement payments, whether monthly, quarterly, half-yearly, or annually.

Additionally, under the new rules, NPS subscribers can make their annuity income tax-free until the age of 75 if they defer the receipt of compulsory annuity payments.

According to the exit guidelines outlined by PFRDA, when exiting due to superannuation, a minimum of 40% of the NPS corpus must be allocated for annuity, which is a pension, and a maximum of 60% can be withdrawn as a lump sum by the subscriber.

If the NPS corpus is up to 5 lacs, the choice of a complete (100%) lump sum withdrawal is permissible.

How Will the New NPS Withdrawal Rule Change Work?

Activating the SLW option requires NPS subscribers to submit a request indicating the preferred withdrawal frequency, as well as start and end dates.

In addition to the SLW option, NPS subscribers have alternative choices. They can postpone withdrawals, continue to be invested with the 60% component, and tailor the drawdowns based on their financial situation and risk tolerance.

NPS subscribers will have the flexibility to either maintain their funds in existing schemes or switch their Pension Fund Manager when selecting the Systematic Lumpsum Withdrawal facility. The returns from this facility will be determined by the chosen plan.

For instance, if the NPS subscriber chooses the active plan, they can actively manage the allocation of their contributions, with a maximum of 50% allocated to equity. Consequently, returns are significantly influenced by market performance and the chosen equity percentage.

On the contrary, the Auto choice, designed for less experienced retail investors, involves investments in a life-cycle fund, where the asset allocation is predefined based on the subscriber's age. Within the 'Auto Choice,' three options - Aggressive, Moderate, and Conservative - cater to different risk appetites.

What Are the Tax Implications of the Same?

According to Section 10(12A) of the Income-tax Act, the lump sum withdrawal of up to 60% on exit from NPS is tax-exempt. While there is no clarity on the taxation rules of the newly introduced NPS SLW facility, many experts believe that as long as the withdrawn portion does not exceed 60% of the total payable amount, the staggered withdrawal facility may not impact the taxability of that amount.

Although partial withdrawals and the acquisition of annuities come with tax advantages, the pension income derived from the annuity is regarded as taxable income. Unlike the Public Provident Fund (PPF) or Employees Provident Fund (EPF), the National Pension System (NPS) does not hold an absolute tax-exempt status.

The NPS annuity regulations remain unchanged. Upon exit, NPS participants are required to allocate 40% of their pension corpus to purchase annuities from insurance companies. Now, NPS users have the option to either choose annuities immediately or defer them until the age of 75. By deferring the compulsory annuity income until the age of 75, NPS subscribers can make their annuity income tax-free.

However, it's important to note that annuity income received from NPS is taxable in the year of payout based on the investor's income tax slab rate. Therefore, when annuity payments commence at the age of 75 and beyond, they will be subject to taxation according to the individual's income tax slab.

How Will the NPS Withdrawal Rule Change Benefit the Subscribers?

1. Generates Regular Cash Flows:

The SLW facility introduces a structured approach to cash disbursement, providing NPS subscribers with a reliable and steady stream of regular cash flows. This is particularly valuable for individuals entering retirement and seeking financial stability. The predictable nature of these cash flows enables subscribers to plan their expenses more effectively, reducing uncertainty and contributing to a more secure financial outlook. Regular cash flows also empower subscribers to meet day-to-day expenses, making SLW a practical and flexible financial tool.

2. Increased Monthly Income Along with Annuity:

When combined with an annuity, the SLW not only ensures consistent cash flows but also has the potential to significantly boost the monthly income of the NPS subscriber. Annuities provide a steady income stream, and when complemented by the structured withdrawals facilitated by SLW, subscribers benefit from a dual-income strategy. This dual-income approach enhances financial resilience, allowing retirees or individuals in need of regular income to enjoy a more comfortable lifestyle.

3. Wealth Creation:

Beyond providing regular income, SLW serves as a powerful tool for wealth creation. By allowing subscribers to withdraw a portion of their corpus systematically, the remaining corpus continues to generate market-linked returns over time. This sustained accumulation of returns on the remaining corpus contributes to long-term wealth creation. The compounding effect of returns on the untouched portion of the corpus can lead to substantial growth, ensuring that NPS subscribers' financial well-being is maintained and enhanced.

4. Tax Benefits:

While the tax regulations for the recently introduced Systematic Lumpsum Withdrawal facility under NPS remain uncertain, many financial experts hold the view that as long as the withdrawn segment remains within the 60% limit of the total payable amount, the phased withdrawal facility is likely to have no adverse effects on the taxability of that specific amount. The potential for tax benefits adds an extra layer of appeal to the SLW, making it a more attractive financial instrument for consideration.

To conclude:

National Pension System (NPS) investors can now choose between withdrawing 60% of their retirement corpus in a single lump sum or receiving payments gradually through the Systematic Lumpsum Withdrawal (SLW) facility after retirement until the age of 75. Once subscribers reach the age of 60 and opt for SLW, they are not allowed further investments in the pension corpus. However, their funds continue to stay invested in the chosen plan, earning returns over time.

The benefits of the SLW facility for National Pension System (NPS) subscribers are multifaceted. From providing a consistent source of regular cash flows to serving as a tool for wealth creation, SLW offers a comprehensive solution for financial planning. When combined with the annuity, it becomes a potent means to enhance monthly income. Moreover, the potential for tax benefits associated with SLW withdrawals adds a layer of financial efficiency, making it an attractive and versatile option for NPS subscribers seeking financial security and growth in their retirement journey.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.