Good news! Subscribers can withdraw up to 25 per cent after 3 years in NPS

Move is in right direction as its give subscriber liquidity and allows them to meet their goals, say analysts

The Pension Fund Regulatory and Development Authority (PFRDA) has relaxed norms for partial withdrawals for subscribers of National Pension Scheme (NPS). The pension regulator has allowed NPS subscribers who have contributed for three years to withdraw up to 25 per cent of the corpus subject to certain conditions. Earlier NPS subscribers were allowed to withdraw from the corpus only after completion of 10 years.

Withdrawals are allowed for higher education and marriage of children, including a legally adopted child, purchase or construction of a residential house or flat, and treatment of various specified illnesses like cancer, kidney failure, stroke, major organ transplant among other illness. According to Hemant Contractor, chairman, PFRDA, “Earlier partial withdrawals were allowed only if a person had been a subscriber for 10 years. But there was a lot of demand coming from subscribers saying that 10 years is too long a period and in case of an emergency they couldn’t wait so long. We listened to all the concerns and decided to allow partial withdrawals after three years.” He added that withdrawals will be allowed only for certain contingencies.  

NPS gained attention as a retirement product after the government provided an additional tax benefit of Rs 50,000 under Sec 80CCD(1b) in Budget 2015-16. Recently the maximum entry age in NPS was increased to 65 years from 60 years. Both salaried, as well as self-employed individuals, get income tax benefits on investing in NPS.

Analysts feel that this move is in the right direction as its gives subscribers liquidity and allows them to meet their goals. There will be no tax liability on the subscriber for partial withdrawals. “Partial withdrawals have been exempted from tax. The government had announced year before last that partial withdrawals will not be taxed,” says Contractor.

Personal finance experts suggest subscribing to NPS as it provides fund options and better return potential due to its equity exposure when compared to Employee Provident Fund (EPF) or Public Provident Fund (PPF). NPS comes with a whole host of investment options. A subscriber can choose a mix of equities, corporate bonds, and government securities. NPS can deliver better returns compared to other government-backed retirement products due to the possibility of higher allocation to equities.

Says Suresh Sadagopan, founder, Ladder7 Financial Advisories: “NPS allows investors to participate in equities. Over longer periods of time, NPS can be a better bet. However, I would say that the final choice between NPS and EPF should be left to the investor. Just because NPS can potentially give double-digit returns it automatically doesn’t become a good vehicle.” Despite being 100 per cent debt-oriented, EPF also has tax advantage over NPS.

Tax treatment for EPF is EEE, which means investors' money is exempt from taxes at the time of investment, accumulation, and withdrawal. On the other hand, in NPS, 40 per cent of the maturity corpus is tax-free, while another 40 per cent of the corpus escapes tax when put in an annuity to earn a monthly pension. However, 20 per cent of the corpus is still subject to tax at maturity.