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National Pension System: Want to exit NPS before reaching retirement age? Here’s all you need to know

If you’re someone who wants to go for voluntary retirement before 60 years, here’s what you need to know about exiting your NPS investments.

The National Pension System (NPS) is a Central government and Pension Fund Regulatory and Development Authority (PFRDA)-backed investment instrument that promises to provide annuity benefits during post-retirement years apart from a lump sum retirement corpus when the subscriber reaches the retirement age of 60 years. This long-term instrument invests the capital invested by its subscribers in various asset classes like equities, government bonds, corporate bonds, etc. to provide substantial returns.

While the Central government employees were the sole beneficiaries of NPS when the scheme was launched, it has ever since been extended to all Indian citizens, Non-Resident Indians and even Overseas Citizens of India (OCI) between the ages of 18 and 60 years. This is a voluntary investment scheme where subscribers can invest during their employment years in their chosen pension fund according to their financial goals and risk appetite to be able to get monthly pension payouts in post-retirement years apart from a lump sum corpus. NPS is also regarded as a highly tax-efficient instrument as it allows an additional Rs. 50,000 tax deduction u/s 80CCD (1B) of the I-T Act, apart from the Rs 1.5 lakh threshold of Section 80C with certain riders.

That being said, the rules pertaining to the exiting NPS are different for those who reach the superannuation age of 60 years, and those who want to exit before reaching the retirement age of 60 years. So, if you’re someone who wants to go for voluntary retirement before 60 years, here’s what you need to know about exiting your NPS investments.

1. If you want to exit from your NPS investments before reaching the retirement age, you must utilize at least 80% of your accumulated pension wealth to purchase annuity which will give you monthly payouts or other periodic payouts you’ve subscribed for.

2. Hence, you can withdraw only up to 20% of the accumulated pension wealth as lump sum retirement corpus.

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3. This benefit segregation structure is different for NPS subscribers who exit after reaching 60 years. Such subscribers need to utilise at least 40% of accumulated pension wealth to purchase annuity, while they can withdraw the remaining 60% as lump sum, tax-free.

4. However, if your accumulated NPS pension wealth is less than or equal to Rs 1 lakh, you will have the option to withdraw the entire fund without having to purchase any annuity plan.

5. If you are a not a government employee, you can opt for premature withdrawal of NPS only after completing 10 years of investments.

6. Also, if you want to voluntarily exit from NPS before reaching superannuation age, you will not have the option to defer either annuity purchase or lump sum withdrawal of retirement corpus – benefits that are reserved only for those subscribers who exit from NPS after reaching superannuation age.

7. Lastly, if an NPS subscriber dies before reaching superannuation age, the entire accumulated pension wealth will be paid to the nominee(s) or legal heirs of the subscriber.

As such, tax benefits, a likelihood to garner good returns in the long term, and a monthly payout during post-retirement years apart from a lump sum retirement corpus make NPS a good retirement investment tool, especially for those who are employed in the private sector as they don’t enjoy any special retirement benefits. And while you still get certain benefits if you prematurely exit NPS as discussed above, it’s better to have a long-term investment approach to absorb the impact of various risk factors on the returns. However, you’ll be well-advised to diversify your long-term investments in various instruments like FD, PPF, mutual funds, NPS etc. to keep the overall risk factor under control and be in a better position to meet your financial goals in time. It’s your retirement fund, after all, and extra effort must be put in to fortify it as you will have limited sources of income once you hang your boots.

(The author is CEO,

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Source: Financial Express