How to exit from NPS? Benefits, rules and procedure explained

Q1.  What are the forms available, and documents required for the exit process from NPS after attaining 60 years of age? What is the submission process, and conditions for Tier 1 and Tier 2 account?

To start the exit process, Subscribers shall not have to wait till 60 years of age. The process starts six months before the subscriber attains 60 yrs of age. Protean CRA intimates the Subscriber about his/her forthcoming superannuation by sending alerts informing the subscriber, about different options available at 60 yrs, what needs to be done if the Subscriber decides to exit from NPS and start pension etc. This gives the Subscriber sufficient time to prepare for his/her superannuation. 

NPS Subscriber has the following choices to make:

1. The Subscriber may choose to withdraw a lump sum amount and annuitize the remaining amount.  A Subscriber has to annuitize a minimum of 40% of the accumulated corpus & up to 60% of the corpus can be withdrawn as a lump sum. [Annuitization is the process of converting annuity (i.e. pension) investment into a series of periodic income payments under the National Pension System (NPS)].

2. The Subscriber may choose either to defer (or postpone) withdrawal of lump sum amount or annuity or both till 75 years of age.

3. Lastly, the Subscriber may choose to continue till 75 years of age.

Further, though the default option is annuitisation of a minimum of 40% of accumulated corpus and lump sum withdrawal of the remaining 60% of the accumulated corpus, an NPS Subscriber has the option to annuitize upto 100% of the accumulated amount that would lead to a higher pension for the Subscriber.

Given the increased mortality age in today’s times, an individual (along with spouse) is likely to have over three decades of retirement life. For this purpose, and considering the inflation rates, a larger steady pension income is of utmost importance. Accordingly, I would like to reiterate that the Subscriber opting for annuitisation of 100% of the accumulated corpus, shall be able to avail of a higher pension amount.

Another interesting aspect that we would like to highlight here is that in NPS, while the Subscriber can choose his/her Pension Fund Manager (PFM) for the accumulation phase, flexibility is also available in the de-accumulation phase in terms of choosing the Annuity Service Provider (ASP) who would be providing Annuity to the Subscriber.

The process to carry out the de-accumulation phase (i.e. exit from NPS) is a seamless one and carried out completely online in a paperless manner. Subscriber has to just initiate online exit request in the system, upload scanned KYC documents & digitally sign the request. No need to submit any physical documents.  This results in the Subscriber saving a lot of time and effort and reducing dependency on any intermediary to a great extent.

If the subscriber has an active Tier- 2  account, the same also gets automatically closed along with Tier 1 account. No separate request to close Tier 2 account is required. 

Q. 2  What are the benefits received on exit? 

Subscribers can enjoy tax benefits upon exit from NPS. Lump sum withdrawal upto 60% of the total accumulated pension wealth is tax exempted. Also, the amount utilized for the purchase of an annuity (for receiving pension) is tax exempted, However, the annuity amount that is withdrawn periodically as pension is taxed as per the individual’s tax bracket.

Here, we would like to bring one interesting aspect w.r.t. tax on NPS exit. Usually, at the time of retirement, an individual has an inflow of funds from various sources such as gratuity and other benefits. The sudden inflow of excess liquidity can more often than not, create confusion with regard to  ‘where to invest?’. Given the extension of the age of investing in NPS after 60 years, upto the age of 75, an individual can park the excess funds received from various sources in NPS and enjoy the tax benefit as per the tax bracket the individual belongs to. There are no tax benefits for Tier 2 withdrawal.

Q3. Can I completely withdraw my accumulated pension wealth without annuitization?

NPS is a pension scheme where you accumulate funds during your working life and get pension from the accumulated corpus after you turn 60. To ensure that the Subscriber gets a sufficient pension, one cannot withdraw entire pension wealth without annuitisation. As we have mentioned above, a minimum of 40% corpus has to be utilised for annuity. However, if accumulated pension wealth is upto Rs.5 lakhs at the time of exit, the subscriber can withdraw the entire corpus.

Q4. What will happen in case one does not exit beyond the age of 60 years or superannuation? When will the amount withheld be settled?

NPS account will remain active until the exit request is processed to withdraw NPS corpus.