With the provision in the recent budget for allowing an additional deduction of Rs. 50,000/– in respect of contribution towards NPs, the interest of the taxpayers who till now did not have an NPS account has gone up substantially. People have started making enquiries and I have received a few emails seeking further guidance and clarification on NPS. The regulator of the NPS “Pension Fund Regulatory and Development Authority (PFRDA) has very recently on 11th May 2015 has issued regulations for withdrawal of NPS amending the rules which were applicable earlier. Let us discuss the regulations with regards to withdrawal of the amount from the NPS account.
Earlier NPS rules did not have any provision for partial withdrawal from the NPS account. The rules notified now provide for partial withdrawal of upto 25% of the contribution made by the subscriber himself subject to certain conditions. This is in line with the withdrawal rules of employee provident fund scheme. It is interesting to note that while calculating the withdrawal eligibility, the contribution of the employer, if any, and any accretion to the amount shall not be taken into account.
Moreover you can not use the facility of partial withdrawal unless you have been member of the NPS for minimum of 10 years on the date of application for withdrawal. The withdrawal shall be permitted for limited purpose like marriage, education of the children, purchase or construction of the house or for meeting the cost for treatment of specified diseases. You can avail this facility of partial withdrawals maximum three times during the whole tenure of your NPS account with a minimum gap of 5 years between two withdrawals.
Withdrawal on Maturity for purchase of Annuity
The earlier rules provided for mandatory withdrawal of minimum of 40% of the accumulated corpus immediately on your reaching 60 years. The new rules however have provided for some flexibility in this regards. A subscriber to the NPS account can request for an extension of maximum of 3 years from the date of his turning 60 years of age for purchase of an annuity. This flexibility will be very useful for the subscribers who have opted for some portion of their investment in equity and the equity market is not in good shape at the time of retirement. Earlier it was mandatory for the subscriber of NPS to buy an annuity on the his turning 60 years of age, whether the equity market is in bull phase or bear phase. This relaxation will give the subscriber of NPS to have some breathing time in case of adverse equity market conditions at the time of his retirement. This becomes more important in view of the recommendation of the Bajpai committee on NPS, for allowing investment in equity upto 100% in phased manner.
For a non government employee subscriber, the amended rules provide for the option to contribute beyond the originally stipulated period of 60 years. Now the other subscribers can exercise the option to continue the subscription beyond the present 60 years of age and upto 70 years of age. This provision will be very beneficial for the self employed people who work beyond the 60 years of age as well as the corporate employees who take up other employment or consultancy assignment after their retirement from corporate jobs. Since the annuity and lump sum withdrawals are taxable in future, the former rules for subscription ceasing on 60 years did not benefit the subscribers as they would have almost paid the taxes at he same rate on the lump sum money received on retirement.
The earlier rules provided for withdrawal of the balance 60% in lump sum or in phased manner but the regulations proposed do not seem to provide for the option of withdrawal of this 60% in phased manner. In my opinion the subscriber should be allowed to withdraw the balance 60% in lump sum or in a phased manner till he completes 70 years of age. Since presently the amount with drawn after purchase of an annuity if fully taxable, the requirement of having to withdraw such amount in full will push the person in higher tax bracket and cause higher tax incidence. Though the Direct Tax Code, whose future is uncertain, proposes this balance withdrawal to be exempt from tax, however the present provisions of Section 80 CCD make it fully taxable.
Stipulation of minimum corpus
The earlier rules of NPS provided for mandatory purchase of annuity by utilising minimum of 40% of the corpus accumulated at the time of reaching the age of 60 years without any reference to the amount accumulated. The new regulations provide that in case the amount accumulated in the tier I account on the date of reaching 60 years does not exceed 2 lacs then the subscriber need not purchase any annuity and is allowed to withdraw the full corpus.
Even in case of withdrawals before completion of 60 years of age, where the subscriber was required to use minimum of 80% of the accumulated corpus for buying annuity, the new rules provide for exemption from requirement of buying an annuity in case the accumulated corpus does not exceed one lakh.
I hope the above discussion will help the readers better understand the scheme.
(Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at firstname.lastname@example.org)