The recent changes in rules regarding early exit and premature withdrawal to the National Pension System (NPS) is expected to lead to greater discipline amongst investors. Besides, the amendments make the scheme more investor-friendly.
The recent changes in rules regarding early exit and premature withdrawal to the National Pension System (NPS) is expected to lead to greater discipline amongst investors. Besides, the amendments make the scheme more investor-friendly.
"The good news is that only serious and long-term investors who have a long-term horizon and a goal of earning decent pension amount after retirement will be considering opening an NPS account now,'' says Anil Chopra, group CEO & director, Bajaj Capital.
Earlier, subscribers could exit the scheme any time without any initial lock-in period. Besides, they were permitted to withdraw up to 20% of the corpus at the time of exit.
"It was being noticed that several subscribers were exiting the scheme and thereby not waiting to get the full advantage of long-term growth and higher pension after the age of 60,'' adds Chopra.
Thus, the rules for exit and withdrawal have been amended recently. As per the new rules, subscribers cannot exit before the expiry of 10 years from the date of opening NPS account.
Besides, investors can only withdraw 25% of the corpus before reaching the vesting age of 60 years. The NPS permits partial withdrawals, up to 25% of the contributions, by the investor only. The withdrawals are permitted for specific reasons such as education and marriage of children, for purchase or construction of a house (provided you do not own a house already) and for treatment of specified illnesses. Besides, there is a cap on the number of withdrawals, that is, total of three withdrawals with an interval of five years between each withdrawal, except in case of illnesses.
Another welcome change is that the scheme permits investors to defer the withdrawal of the lumpsum amount (after the purchase of the mandatory annuity) until he or she attains the age of 70 years, provided the subscriber intimates his or her intention in writing at least 15 days before the attainment of age of superannuation.
Also, one additional benefit to investors is that the subscribers to the scheme can defer the annuitisation by a maximum of three years.
"This is a positive move which should be welcomed by all as same is for the long-term benefit of citizens as well as Pension Fund Managers,'' says Chopra.
NPS, launched by the Pension Fund Regulatory & Development Authority (PFRDA), is India's answer to the USA's retirement scheme - 401(K).
Initially the NPS was central and state government employees only. Later in 2009 the same was made open for general public also. However, the scheme was unable to attract the masses at that time.
In order to make the scheme attractive to investors, the government announced additional tax breaks in the 2015 budget. Thus, individuals were now allowed to invest an additional Rs 50,000 to the NPS under Section 80CCD. This was over and above the Rs 1.5 lakh limit under Section 80C.
"Post Budget 2015 announcements, NPS has become much sought after investment option as a taxpayer can save additional tax of up to Rs 15,000 by opening an NPS account and investing Rs 50,000 in the scheme provided he is in 30% tax bracket,'' says Chopra.
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