NPS: Ambit of reasons for withdrawal expanded; use facility cautiously

Withdrawal made during tenure for other goals will erode retirement corpus

The Pension Fund Regulatory and Development Authority (PFRDA) came out with a master circular on January 12 regarding the new rules that will govern partial withdrawal from the National Pension System (NPS). These rules will come into force on February 1.

Current rules

A subscriber can withdraw a part of their NPS corpus before retirement. Up to 25 per cent of the amount accumulated can be withdrawn. Here the amount accumulated refers to the employee’s contribution. Withdrawal cannot be made from the portion of the corpus contributed by the employer.

Subscribers can only make a partial withdrawal after having completed three years in NPS. Altogether, they can make only three partial withdrawals throughout their entire tenure in NPS.

According to Amit Kumar Nag, partner, AQUILAW, “The permitted reasons for withdrawal include children’s higher education, children’s marriage, purchase or construction of a residential house, and treatment of critical illnesses.”

What will change
 

Housing: If a subscriber makes a partial withdrawal for the purchase or construction of a residential house or flat, then money can be withdrawn from NPS for the purchase of the first house only. An inherited house will not count for this purpose. “An ancestral property is not considered a house or flat purchased or constructed by the subscriber,” says Suma R V, partner, King Stubb and Kasiva.
 

Children: A subscriber can make a partial withdrawal for their children’s education or marriage. PFRDA has clarified that children include legally adopted children.
 

Reskilling and startup: The regulator has widened the ambit of purposes for which partial withdrawal can be done. These now include skill development or reskilling, and also to establish one’s venture or startup.

Use withdrawal facility with caution

NPS is meant to be a retirement savings tool. The purpose of providing the partial withdrawal facility is to allow some flexibility. Says Suma: “Partial withdrawal helps members meet specific financial exigencies.”
 

However, using this facility runs the risk of eroding the final retirement corpus. Therefore, it should be utilised with utmost caution. As Vanshika Ahlawat, associate, PSL Advocates & Solicitors, says: “Ensure withdrawals do not compromise the primary goal of building a robust retirement corpus.” 
 

Partial withdrawal of up to 25 per cent is tax-free and hence does not carry any tax implication.

Should you opt for NPS?

NPS is a cost-efficient investment mechanism that allows investors flexibility in choosing their asset allocation (allocation to equities and debt) based on their risk appetite. As it offers equity exposure, returns over the long term are likely to be higher than from other long-term, fixed-income alternatives like Public Provident Fund.
 

Through NPS, subscribers can also get an additional tax deduction of Rs 50,000 under Section 80CCD1(B). This deduction is exclusive to NPS. It is over and above the Section 80C deduction of Rs 1.5 lakh. Upon retirement, subscribers can withdraw 60 per cent of the corpus as a lump sum. This amount is tax-free.
 

On the downside, NPS has a long lock-in period until retirement. If a subscriber withdraws from NPS prior to retirement, 80 per cent of the money must be invested in an annuity and only 20 per cent is received as a lump sum. 

Upon retirement, subscribers must use 40 per cent of the corpus to buy an annuity. The interest payouts by annuity plans can sometimes be low and are taxable at slab rate.  NPS is well suited for higher-income people who are unlikely to need the money invested in NPS before retirement. It may not be ideal for someone who may need the money for emergencies before retirement. 
 

Those who want equity exposure,  tax benefits (under Section 80C) and anytime liquidity may consider equity-linked savings schemes.