Get 60% higher pension by delaying your NPS exit by 5 years; know how NPS continuity and deferment options can help you By exploring deferment, continuance, and systematic withdrawal options, individuals can optimize their NPS corpus for long-term financial security and flexibility. A delay in exit can not only save taxes but can help you build big retirement kitty and hence higher pension
You can exit your investments in the National Pension System (NPS) at the age of 60 and generate regular income by buying an annuity plan and investing the lump sum received from your NPS corpus. However, what if you have not saved enough for your retirement? Delaying your NPS exit by a few years may help you significantly. Many would continue working post 60 so that they can use the delayed exit from NPS to give a boost to their post-retirement income.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} When an NPS subscriber attains the age of 60, they have three options. Firstly, there is the exit option. In such cases, the investors can withdraw up to 60% of the corpus in lump sum (tax-free), while the balance 40% has to be used to purchase annuity.
However, there are two more options available before a person reaches the age of 60 --They can opt for Continuance or for Deferment.
Let us understand how these options work and how they can help you save taxes, boost your retirement corpus and get a higher pension.
Let us understand with an example. If you have accumulated Rs 1 crore corpus at the age of 60, you can earn an annual income of Rs 7.4 lakh by purchasing an annuity with Rs 40 lakh with 6.5% return annually and investing your Rs 60 lakh lumpsum at 8% return annually. However, if you delay your exit by five years you earn a pension of Rs 11.77 lakh, which is 60% more than what you could have got by exiting at 60. If you wait longer, say for 10 years and 15 years, you may get an annual income of Rs 18.47 lakh and Rs 28.31 lakh, respectively.
How delayed exit from NPS can help you get a significantly higher pension
Retirement and pension stages in NPSNormal exit at the age 60
Annuity deferred till 63, lumpsum deferred till 75
Continued NPS - Exited at 65
Continued NPS - Exited at 70
Continued NPS - Exited at 75
Retirement Corpus at the age 60
Rs 1 cr
Rs 1 cr
Rs 1 cr
Rs 1 cr
Rs 1 cr
Retirement corpus after delayed exit
Rs 1 cr
Rs 2.51 cr
Rs 1.59 cr
Rs 2.50 cr
Rs 3.82 cr
Amount used for annuity purchase (40% of corpus)
Rs 40 lakh
Rs 52.63 lakh
Rs 63.64 lakh
Rs 1 cr
Rs 1.53 cr
Annual return on purchased annuity
Rs 2.6 lakh
Rs 3.42 lakh**
Rs 4.13 lakh
Rs 6.49 lakh
Rs 9.94 lakh
Lumpsum received after exit (60% of corpus)
Rs 60 lakh
Rs 1.99 cr
Rs 95.46 lakh
Rs 1.5 cr
Rs 2.29 cr
Annual return on lumpsum
Rs 4.8 lakh
Rs 15.90 lakh
Rs 7.63 lakh
Rs 11.98 lakh
Rs 18.36 lakh
Total Income Tax Paid on NPS returns till 75*
Rs 34.63 lakh
Rs 12.81 lakh
Rs 36.73 lakh
Rs 28.81 lakh
0
Total annual earning at 75
Rs 7.4 lakh
Rs 19.32 lakh
Rs 11.77 lakh
Rs 18.47 lakh
Rs 28.31 lakh
Total post tax annual earning at 75*
Rs 5.09 lakh
Rs 13.30 lakh
Rs 8.10 lakh
Rs 12.71 lakh
Rs 19.48 lakh
Continuity option taken with Rs 500 annual contribution till exit, *For 30% income tax bracket with annual income below Rs 50 lakh, **started at 63, Assumptions: Annual return on NPS investment corpus and lumpsum is 8%, Annuity rate 6.5%
How long can you defer your NPS exit
In deferment of withdrawal from NPS, the investor can either defer lumpsum withdrawal, or defer withdrawal of annuity, or can opt to defer both parts of the NPS. “NPS gives an option of deferment on exit or withdrawal from NPS till the maximum age of 75 years. To continue being a subscriber of NPS even after reaching superannuation, the subscriber is required to initiate deferment request 15 days prior to the attainment of superannuation age/ 60 years of age,” says Deepak Mohanty, Chairperson, PFRDA.The deferment of withdrawal can be done in two ways. “You can either defer and withdraw in one shot or you can defer and withdraw the corpus in instalments. Remember, that when you defer withdrawals, you are not allowed to contribute anything further to the NPS plan,” says Nehal Mota, Co-Founder & CEO, Finnovate.
Your funds just stay invested in NPS for a maximum of 15 years up to the age of 75. “You stop adding anything new after 60, but what's inside keeps growing based on market returns. It is like putting your retirement money in a safe,” says Sanjeev Govila, Certified Financial Planner, CEO, Hum Fauji Initiatives.
You cannot defer annuity beyond 3 years
In case of deferment, Mohanty explains the three possible scenarios -(i) Deferment of Annuity: The subscriber may decide to defer only the annuity (minimum 40%) and withdraw 60% of the corpus as lumpsum immediately. The corpus deferred for annuity purchase in future (future value) would have to be annuitized.
(ii) Deferment of Lump Sum: The subscriber may decide to defer only the lump sum withdrawal (maximum 60%) and choose to purchase the annuity (minimum 40%) immediately. The deferred lump sum amount is withdrawable in full / phases, at any point during the deferment period.
(iii) Deferment of both Annuity and Lump sum: The subscriber may decide to defer both annuity and lump sum. Post deferment, at the time of exit, the subscriber can purchase the annuity (minimum 40%) of the total corpus and the remaining amount can be taken as lump sum.
You can defer the withdrawal of lump sum and withdrawal of the pension corpus for 15 years from the day of retirement. However, the annuities purchase will have to start early. “The purchase of annuity can only be deferred for a period of 3 years. If you retire at the age of 60, you can only defer purchase of annuity up to the age of 63, not beyond that,” says Mota.
The next question is which corpus is taken to calculate the mandatory 40% for the purchase of annuity – the one at the time of 60 years or at the time of exit? "The 40% minimum annuity purchase is based on the AUM (Asset Under Management) at the time of exit, not the AUM at 60 or during the deferment period," says Govila.
What happens if you want a systematic withdrawal of your lumpsum? “If you are opting for partial phased withdrawal, then the annuity purchase must be complete before the first tranche of the lumpsum withdrawal,” says Mota.
NPS continuation option allows you to exit at your will
In the Continuance option, the NPS subscriber continues to contribute to the NPS plan. “In order to opt for continuation with NPS, the Subscriber has to initiate its request for continuation under NPS 15 days prior to the attainment of superannuation age/ 60 years of age,” says Mohanty.However, you have to pay a minimum amount annually to keep your NPS account active. “During the continuation period, the subscriber has to make a minimum contribution of Rs. 1,000 per year to its PRAN and enjoy the tax benefits. The Subscriber can also continue to avail all the options and facilities of a normal NPS account, like access to the CRA system, switching asset classes and fund managers, etc.” says Mohanty.
This option gives you greater flexibility. “The advantage here is that a person who has opted for Continuance can withdraw at any point of time during the extended period. During the Continuance period, the NPS subscriber can discontinue at any time during the extended period and split the withdrawal between annuity pensions and lumpsum withdrawal. In short, once you opt for continuance, there is no lock-in involved at all and the exit can happen at any point of time,” says Mota.
However, you can only choose only one option which cannot be reversed later on. “Once the option of continuation is exercised by the Subscriber, the other options of deferment will not be available,” says Mohanty.
Unless you ask for exit, your NPS will continue
In the NPS system, the default option is Continuance regarding contributions to the NPS corpus. “If you want to exit the NPS or if you want to defer withdrawals, then you need to apply with a request; either offline or online and at least 15 days before your retirement date,” says Mota.
Even when you do nothing when you reach the age of 60, you get the continuity option by default. “If a subscriber does not opt for any of the options mentioned above within the prescribed timelines then the subscriber's account will get auto-continued,” says Mohanty.
Which is better option for NPS investors: Continuation or deferment?
Who should opt for the deferment option? “Deferment of withdrawal makes a lot of sense for professionals who still have a running active practice or business income flows at the age of 60. If your income flows are likely to continue for another 8-10 years, you can as well keep that money for a rainy day in future and continue to retain the corpus with the pension fund itself. That way, it continues to earn attractive returns,” suggests Mota.People who are certain that they would need regular income within three years but can wait longer for the lump sum part, can opt for the deferment option. “Deferment option has more flexibility with respect to partial deferment, i.e. deferring either the Annuity only or Lump sum only. In the continuation option, subscriber has to continue both,” advises Mohanty.
However, if you are not sure about the future, then the continuation option provides greater flexibility. “The continuation option has more flexibility with respect to contributions since subscriber can contribute during continuation period which is not available in deferment option,” suggests Mohanty. "Deferments are suitable if you are comfortable waiting a few years (up to 3 years) to start receiving regular pension payments. Continuity can be a better option compared to deferment if you value flexibility in your retirement planning," says Govila.
How NPS exit decision will impact your income tax burden
If you are currently earning, with a likelihood of continued income, delaying your exit from NPS can help you save significantly on taxes. “If you expect to have income from active work or other sources for the next 5-10 years, deferring lets you keep your NPS corpus invested and tax-deferred within the scheme. This can be beneficial if your current income tax bracket is high,” says Govila.The more you delay your exit, the more it will help your NPS corpus to grow tax-free. “Exiting NPS triggers taxes on both the annuity income and returns on lump sum withdrawals. Deferring the exit allows you to postpone these taxes until your income might be lower in the future, potentially reducing your overall tax liability,” says Govila. So delaying NPS exit can help you save taxes. “Don't rush NPS withdrawal if you're financially comfortable now. Delaying could mean lower taxes later and access to a lump sum whenever you truly need it,” says Govila.
It's important to note that the NPS corpus itself is tax-free. Only the returns, such as pension, interest, and dividends, are taxable when the money is invested. “One must remember that the corpus itself is tax free. For instance, the 60% lumpsum withdrawal and the 40% you invest in annuities are tax-free income in the hands of the investor. However, any pension received from the insurance company and any interest or dividends received from the lumpsum corpus received from the NPS will be taxable in the hands of the investor,” says Mota.
If your corpus is small, you can withdraw the entire corpus without purchasing any annuity. “If your overall corpus is less than Rs5 lakhs, the entire corpus can be withdrawn tax-free, with no annuity obligations. Tax benefits remain the same whether you exit at 60 or you exit at 75.” says Mota.
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This story originally appeared on: India Times - Author:Faqs of Insurances
