NPS | Pension - These NPS investors can exit from scheme after 5 years lock-in period only (2024)

The Pension Fund Regulatory and Development Authority (PFRDA) has reduced the lock-in period for NPS investments from 10 years to 5 years for self-employed individuals and others not having employer-employee relationship such as workers on fixed-term contracts etc. The change was implemented via a notification dated December 28, 2021. As per the notification, National Pension System (NPS) subscribers who do not have an employer-employee relationship can voluntarily exit from NPS after completing a lock-in period of 5 years instead of 10 years earlier.

However, the lower lock-in does not apply for salaried individuals who invest in NPS. Saraswathi Kasturirangan, Partner, Deloitte India says, "One needs to know that only those NPS accounts are eligible for a lower lock-in period of 5 years where there is no employer-employee relationship. This would mean that any salaried employee is not eligible for a lower lock-in period. This is applicable for self-employed individuals, fixed-term employee, consultants who have left the previous employer."

As per the notification, "In first para of sub-regulation (b) of Regulation 4, the words "voluntarily opts to exit from the national pension system the option so exercised shall be allowed only upon such subscriber having subscribed to the national pension system for at least a minimum period of ten years. In case of such subscriber", the words "or subscriber not having any employee-employer relationship having subscribed to the National Pension System for at least a minimum period of five years, voluntarily opts to exit from the National Pension System, then" shall be substituted."

Kasturirangan says: "The existing Regulation 4 (b) of the PFRDA (Exits and Withdrawals under NPS Regulations) deals with the exit from NPS by citizens, including corporate sector subscribers before attaining the age of superannuation. It states that if an NPS subscriber wishes to voluntarily exit from NPS before attaining the superannuation age/ 60 years (as prescribed), he shall be allowed to do so only after he has stayed invested in NPS for a minimum of 10 years. The aforementioned regulation has been amended by a recent Gazette Notification dated December 28, 2021, which states that - if an NPS subscriber not having an employer-employee relationship, wishes to voluntarily exit from NPS before attaining the superannuation age/ 60 years (as prescribed), he shall be allowed to do so after he has stayed invested in NPS for a minimum of 5 years."

How the NPS corpus can be withdrawn
If an individual is eligible and decides to exit from the NPS scheme, he or she will be mandatorily required to use 80% of the accumulated corpus to purchase an annuity and the remaining 20% will be paid as lumpsum. However, do note that as per a gazette notification, from June 2021, if the lumpsum accumulated in the NPS account does not exceed Rs 5 lakh, then the total amount can be withdrawn without buying any annuity.

Kasturirangan says, "If an individual decides to exit from NPS scheme after the completion of five years and accumulated amount does not exceed Rs 5 lakh, then the entire balance can be withdrawn as a lumpsum amount."

What is NPS?
NPS is a voluntary contribution scheme that helps to save for retirement. An individual wanting to save for retirement can start investing in NPS from the age of 18 years and continue to invest till the age of 70 years. Individuals have the option to exit the scheme at the age of 60 years or superannuation age. However, they can continue to remain invested in the scheme till the age of 75 years.

Minimum investment in NPS starts from Rs 1,000 every financial year with no limit on the maximum amount. Income-tax benefit is available under the various sections of the Income-tax Act, 1961. These include section 80CCD (1) for a maximum up to Rs 1.5 lakh which comes under the overall limit of Section 80C, Rs 50,000 under section 80 CCD (1b) and section 80CCD (2) up to 10% of basic salary; both of these tax benefits are available over and above the section 80C limit.

The returns earned from NPS are market-linked. At the time of maturity, an individual is mandatorily required to use 40% of the accumulated corpus to buy annuity and balance can be withdrawn as a lump-sum amount.

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