Transfer of Funds from a Superannuation Trust to NPS

1. Introduction

Traditionally, many Indian companies provided retirement benefits through an Approved Superannuation Fund, where the employer contributed money to a trust managed by trustees or insurers such as Life Insurance Corporation of India. However, many organizations are now shifting these retirement savings to the National Pension System (NPS) because it offers lower administrative costs, greater investment flexibility, potentially better returns, and tax-efficient transfers.

The government and Pension Fund Regulatory and Development Authority have enabled smooth, tax-free transfers of accumulated superannuation funds into NPS, either for individual employees or in bulk. To make this transfer legally valid, the superannuation trust usually executes a Deed of Variation (DOV), which amends the trust deed and authorizes the trustees to move the retirement corpus to NPS. Overall, companies are increasingly adopting NPS as a more modern and efficient retirement savings solution for employees.

This article explains what a superannuation trust is, why employers are moving to the NPS, the legal and regulatory basis for tax-free transfers, the step-by-step process at both the individual and bulk level, and the specific role of the Deed of Variation.

2. What Is a Superannuation Trust?

A superannuation fund is an employer-sponsored retirement-benefit scheme. The employer establishes a trust, governed by a trust deed and a set of rules, and contributes a portion of the employee’s salary into it on a recurring basis. The trustees hold and invest these contributions for the benefit of members, and the accumulated corpus becomes payable on the employee’s retirement, death, or exit, as defined by the trust rules.

Where the fund satisfies the conditions in Part B of the Fourth Schedule to the Income-tax Act, 1961 (Part B of Schedule XI as per the Income Tax Act 2025), it becomes an “approved superannuation fund,” which gives it favourable tax treatment

Key features of a superannuation trust

• Employer-funded: Contributions are made by the Employer. Employee contributions are not mandatory but are permissible under the trust deed and rules; where made, they qualify for deduction under Section 123 of the Income-tax Act, 2025 (previously Section 80C of the 1961 Act), subject to the overall prescribed limit.
• Governed by a trust deed: The deed and rules provides for the eligibility, contribution levels, vesting, and the conditions for payout and transfer.
• Trustee-managed: The trustees must act solely in the interest of the members and can only do what the trust deed and the Income-tax Act expressly permit them to do.

3. What Is the National Pension System (NPS)?

The NPS is a government-backed, voluntary, defined-contribution retirement-savings scheme regulated by the PFRDA. The Subscriber contribute into a low-cost, market-linked account managed by professional pension fund managers, and the corpus grows based on the performance of the chosen investment mix across equity, corporate debt, and government securities.

At retirement, the subscriber can withdraw a lump sum and must use the balance to purchase an annuity that provides a regular pension. The NPS is portable across jobs and locations, is far cheaper than most managed products, and is anchored by a unique Permanent Retirement Account Number (PRAN) that stays with the subscriber for life.

4. Why Shift from a Superannuation Trust to the NPS?

The decision to migrate is rarely made for a single reason. For employers, running a superannuation trust carries administrative cost, trustee responsibility, and ongoing compliance. For employees, the superannuation scheme can feel inflexible and opaque. The NPS addresses both sets of concerns. The table below summarizes the most commonly cited advantages.

5. The Legal and Tax Basis for a Tax-Free Transfer

The single most important enabler of this migration is that the transfer itself is tax-neutral. In the 2016–17 Budget, the Government allowed subscribers of recognised provident funds and superannuation funds to move their corpus into the NPS without any tax cost. To give this effect, sub-clause (v) was inserted into Section 10(13) of the Income-tax Act, 1961 (Schedule II -Table: Sl. No. 8 under the new Income Tax act 2025).

The PFRDA then issued a circular dated 6 March 2017 laying down the operational procedure. The combined effect of the law and the circular is clear on three points:

• The amount transferred from an approved superannuation fund to the NPS is not treated as the subscriber’s income for that year, and therefore is not taxable.
• Because it is not a fresh contribution, the transferred amount cannot be claimed again as a tax deduction by the employee & employer in the year of transfer.
• The transfer of a superannuation fund is generally a one-time movement of the existing corpus into the NPS Tier I account.

Crucially, the PFRDA framework also reminds trustees that any transfer must still comply with the provisions of the trust deed read together with the Income-tax Act. This is precisely where the Deed of Variation becomes necessary.

6. The Deed of Variation (DOV) to an Existing Superannuation Trust

A trust deed is the constitutional document of the superannuation fund. Trustees can only do what the deed empowers them to do. Most legacy superannuation deeds were drafted long before the NPS existed and contain no provision authorising trustees to transfer the corpus into an NPS account. Without express authority, a trustee who transfers funds risks acting beyond their powers (ultra vires) and breaching fiduciary duty.

A Deed of Variation (also written Deed of Variation, DoV) is the legal instrument that amends the existing trust deed and rules to insert that missing authority. It varies, rather than replaces, the original deed, so the same trust continues and members retain their existing balances and status; a properly drafted DOV does not create a new trust.

What the Deed of Variation typically does

• Inserts an enabling clause that expressly permits the trustees to transfer a member’s accumulated balance to that member’s NPS account.
• Aligns the trust rules with the conditions governing approved superannuation funds and the tax-neutral transfer mechanism under the Income-tax Act, 2025 — specifically Schedule II (Table: Sl. No. 8) for the NPS transfer exemption, Part B of Schedule XI for the approval conditions of an approved superannuation fund— so that the fund’s approved status and tax-neutrality on transfer are preserved.

References to Section 10(13)(v) and Part B of the Fourth Schedule of the Income-tax Act, 1961 are retained where relevant for transfers or approvals initiated prior to 1 April 2026.

Approvals required for the Deed of Variation

Because the fund’s approved status is tied to the Income-tax Act, a deed of variation that usually needs the con of the Commissioner of Income Tax (the approving authority for the fund). In practice, the steps an employer take are:

1. Board / settlor decision: the employer (principal company) resolves to enable transfers to the NPS and to amend the scheme.

2. Drafting the DOV: legal counsel drafts the Deed of Variation amending the trust deed and rules.

3. Trustee execution: the principal employer and the trustees execute the deed; it is stamped as required under the applicable Stamp Act.

4. Income-tax approval: the amended deed is filed with, and approval obtained from, the Commissioner of Income Tax so that the fund retains its approved status.

5. Onboarding NPS architecture: the employer registers with a Central Recordkeeping Agency (CRA)

7. The Transfer Process — Bulk Migration by the Employer

Where an employer is moving an entire superannuation scheme, the PFRDA permits a bulk transfer on an “as-is-where-is” basis, addressed in its circulars of 2018 and 2019. The defining feature of a bulk transfer is the treatment of the underlying assets:

• The existing underlying assets of the superannuation fund are valued at market value (marked to market) using the existing valuation practices.
• Any difference in the value of the corpus arising from this marked-to-market valuation on transfer is borne by the superannuation fund trust or by the subscribers, not by the receiving pension fund.
• Underlying assets and securities are transferred to the pension fund by the existing superannuation fund. The pension fund consents to each asset through negotiation with the superannuation trust.
• Employees who are members of the superannuation fund register in the NPS through the normal process, and the bifurcation of employer and employee contributions is provided and uploaded into the CRA system.

In a bulk migration, the employer first registers itself as a corporate with a CRA, obtains a corporate registration number under the NPS, and maps each employee’s individual account to the corporate NPS account before the corpus moves across.

8. Points to Watch

• Never transfer before the Deed of Variation is in place and re-approved by the income-tax authority.
• One-way, one-time: the superannuation-to-NPS transfer is generally a one-time movement; it cannot be reversed once executed.
• No double tax benefit: the transferred corpus is not a fresh contribution, so it does not get allowed as a deduction in the transfer year.
• Member communication: Employees should understand that NPS exit rules differ — at least 20% of the corpus must be annuitized at retirement by a private sector employee.

9. Conclusion

Shifting funds from a superannuation trust to the National Pension System (NPS) can offer several advantages, including lower administrative costs, greater portability, enhanced employee control over retirement investments, and a more favourable tax treatment on retirement withdrawals. However, these benefits can be realised only when the migration is carried out within the legal and regulatory framework. A Deed of Variation to the existing superannuation trust deed is a critical prerequisite, as it empowers the trustees to transfer the corpus, preserves the fund’s approved status, and ensures compliance with the provisions of the Income-tax Act and the regulations of the Pension Fund Regulatory and Development Authority (PFRDA).

Accordingly, employers should adopt a structured approach by first amending the trust deed, obtaining the necessary approvals, and only then proceeding with NPS onboarding and fund transfer, while seeking appropriate legal and tax advice based on the specific terms of their trust and employee population.

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Disclaimer: This article is for general information only and reflects rules and PFRDA guidance as understood at the time of writing. It is not legal, tax, or financial advice. Specific transfers should be undertaken only after professional advice and verification of the current trust deed, the Income-tax Act, 1961, and prevailing PFRDA circulars