MORE FREEDOM, LESS RESTRICTIONS: NEW NPS RULES EXPLAINED

NPS is a market-linked defined contribution scheme that helps you save for your retirement. The scheme is simple, voluntary, portable and flexible. It is one of the most efficient ways of boosting your retirement income and saving tax. It allows you to plan for a financially secure retirement with systematic savings in a planned way.

The Pension Fund Regulatory and Development Authority (PFRDA) has rolled out major reforms to the National Pension System (NPS). Among the key changes are a reduction in the mandatory annuity requirement to 20%, the option for subscribers to stay invested in NPS until the age of 85, and the introduction of a Systematic Unit Redemption facility with a minimum duration of six years.

Additionally, both government and non-government subscribers can now withdraw their entire corpus as a lump sum if it is ₹8 lakh or less. For larger amounts, government subscribers have the flexibility to allocate at least 40% of their retirement corpus toward annuity purchases, while non-government subscribers are required to allocate a minimum of 20% for annuities.

Here is a breakdown of the most significant changes:

Age Limit - Subscribers can now remain invested in the NPS until the age of 85, up from the previous limit of 75. This applies to both government and non-government employees, allowing for longer wealth compounding.

Citizenship Changes - If a subscriber ceases to be an Indian citizen, they now have the option to close their individual account and withdraw the entire accumulated corpus as a lump sum.

Systematic Unit Redemption (SUR) - a feature similar to a Mutual Fund SWP (Systematic Withdrawal Plan).

• Eligibility: Available for those with an Accumulated Pension Wealth (APW) between ₹8 lakh and ₹12 lakh.
• Structure: Subscribers can take a lump sum of up to ₹6 lakh and convert the remainder into SUR.
• Tenure: Once SUR is opted for, units must be withdrawn over a minimum period of six years.

New Withdrawal & Annuity Thresholds - The rules for mandatory annuity purchases have been relaxed to provide more liquidity:

• Full De-minimis Withdrawal: Subscribers with a total corpus of ₹8 lakh or less can now withdraw 100% as a lump sum.
• Reduced Annuity Requirements:

o Non-Government Subscribers: Can now limit annuity purchase to just 20% of the corpus (previously higher), allowing an 80% lump sum withdrawal.

o Government Subscribers: Must still utilize at least 40% for an annuity but gain new exit combinations involving SUR.

Partial Withdrawal Rules - The PFRDA has increased the frequency and accessibility of partial withdrawals:

• Pre-Retirement: Subscribers can now make up to four partial withdrawals (up from three) before age 60, provided there is a four-year interval between each.
• Post-60/Retirement: Those staying in the NPS beyond retirement can make partial withdrawals every three years.
• Cap: Withdrawals remain capped at 25% of the subscriber's own contributions.

Missing Subscribers - In cases where a subscriber goes missing, nominees/legal heirs are entitled to 20% of the corpus as immediate interim relief. The remaining 80% is settled once the subscriber is legally presumed dead under the Bharatiya Sakshya Adhiniyam, 2023.

Account-centric approach - Subscribers under the National Pension System (NPS) who hold multiple pension schemes under a single Permanent Retirement Account Number (PRAN) will have each pension account treated separately at the time of exit, as clarified in the “Exits and Withdrawals from National Pension System (NPS) for All Citizen Model” by the Pension Fund Regulatory and Development Authority (PFRDA).

WHAT HAPPENS TO NPS CORPUS AFTER YOU TURN 60? HERE’S WHAT YOU CAN DO WITH YOUR MONEY

SUPPOSE YOUR FIRST CHOICE IS TO CONTINUE

If the subscriber does not opt to exit NPS and stay invested till 85, there is no impact on the subscriber status or investment portfolio. The subscriber corpus stays invested in the same schemes as before. The subscriber has the same access parameters as before and can revise their profile, change fund manager or investment pattern, add new schemes or make changes in the current schemes as before. In short other than being eligible to exit NPS, there is no change for the subscriber.

SUPPOSE YOUR SECOND CHOICE IS TO EXIT

At 60, the NPS gives you three key levers to structure your retirement income in a balanced way.

1. Liquidity: Lump sum withdrawal

Withdraw up to 80% of your corpus (with up to 60% tax-free under current rules). This provides immediate cash for loans, medical needs, or lifestyle expenses. You can also reinvest in Mutual Funds with SWP for regular income.

2. Stability: Annuity (monthly pension)

The biggest difference between government and private NPS lies in the mandatory annuity requirement. Government subscribers generally need to use 40% of their NPS corpus to buy an annuity if the corpus exceeds the threshold of Rs 12 lakh. In contrast, private sector subscribers are required to annuitize only 20%, allowing them to withdraw a much larger portion of their savings. Both government and private subscribers can defer annuity purchase up to age 85 as the new rule offers more flexibility to those who wish to stay invested longer.

3. Flexibility: Staggered withdrawals

Withdraw funds in phases using SLW/SUR instead of all at once. The remaining corpus stays invested and can grow, providing sustained income. Earlier, it was 40 percent mandatory. But now, it can be as low as 20 percent for many private subscribers. Although Government NPS subscribers can typically withdraw up to 60% of their corpus. This becomes your guaranteed pension, helping you manage day-to-day expenses without worrying about market ups and downs.

NPS gives you more freedom than most people realise. You can either take cash, create a pension, or simply wait and decide later after you retire with a huge NPS corpus. Together, these three elements help you manage both immediate financial needs and long-term security without feeling locked into a single option.

WHAT SHOULD GUIDE YOUR DECISION?

The right mix depends entirely on your personal situation. Factors such as your existing retirement income, your health and lifestyle needs, and your responsibilities towards dependents or legacy planning all play an important role. There is no one-size-fits-all answer. This means what works well for one retiree may not suit another, which is why these decisions should be made carefully based on your own financial and family circumstances.

TAX BENEFITS- OLD VERSUS NEW REGIME

A NOTE ON NPS VATSALYA

The National Pension System Vatsalya (NPS Vatsalya), launched on July 23, 2024, aims to promote early savings habits and strengthen long-term financial security for children. Designed by the Pension Fund Regulatory and Development Authority, this scheme serves as a flexible, long-term wealth creation plan with defined guidelines.

Under the scheme, all Indian citizens below the age of 18 are eligible to open an account. A parent or legal guardian can open and manage the account on behalf of the minor until they reach adulthood, while the child remains the sole beneficiary throughout.

NPS Vatsalya: Transition on Attaining Adulthood

When the NPS Vatsalya account holder turns 18, the account automatically transitions into a regular NPS (Tier I) account. A key advantage is the continuity of the account, there is no need to open a new one, allowing the benefits of long-term compounding to continue uninterrupted.

After turning 18, the account holder gets a 3-year window (till age 21) for certain benefits and decisions.

• Partial withdrawals allowed:
• Up to 25% of the corpus per withdrawal
• Permitted for specific purposes like education, medical treatment, or specified disabilities
• Withdrawal limits:
• Up to 2 times before age 18
• Up to 2 times between ages 18–21 (subject to conditions)

• KYC requirement:
• Fresh KYC is mandatory once the account holder turns 18

• Options after turning 18:
• Continue under NPS Vatsalya until age 21
• Shift to a regular NPS Tier I account (All Citizen Model or other applicable model)
• Opt for exit

• Exit rules:
• Up to 80% of the corpus can be withdrawn as a lump sum
• If corpus is below ₹8 lakh → full withdrawal allowed
• If corpus is above ₹8 lakh → a portion must be used to purchase an annuity for pension income

• Contribution details:
• Contributions can be made by parents, relatives, or friends (as gifts)
• Minimum contribution: ₹250 (initial and annual)
• No maximum limit on contributions

INVESTMENT OPTIONS UNDER NPS

The plan provides two different scheme preferences for selection.

1. Active Choice

2. Auto Choice

Active Choice

Under the Active Choice option, a guardian of an NPS Vatsalya account holder can allocate investments as follows: up to 75% in equity for higher growth potential, up to 100% in corporate debt for stability, up to 100% in government securities for safety, and up to 5% in alternate assets for diversification.

Auto Choice

Depositors who do not wish to select the Active Choice option are placed under Auto Choice by default, where investments are made through a life-cycle fund. In this option, the allocation across the three asset classes is decided by a predefined portfolio that changes according to the subscriber’s age.

CONCLUSION: The Pension Fund Regulatory and Development Authority has introduced major reforms to the National Pension System (NPS), increasing flexibility and liquidity for subscribers. Key changes include reducing the minimum annuity requirement to 20% for non-government subscribers (40% for government), allowing full withdrawal if the corpus is ₹8 lakh or less, and extending the investment age limit to 85. A new Systematic Unit Redemption (SUR) option enables phased withdrawals over at least six years. Partial withdrawals are now more frequent, and rules for missing subscribers provide interim relief to nominees. At retirement, subscribers can choose between lump sum withdrawal, annuity (pension), or staggered withdrawals. Tax benefits remain under specific sections, mainly in the “Old Regime”. Additionally, NPS Vatsalya promotes early savings for minors with flexible contributions and a smooth transition into a regular NPS account at adulthood.