National Pension System: Top 5 changes in NPS rules you must know in 2024

NPS is an easy-to-invest, tax-efficient retirement scheme. (Image: Freepik)

NPS (National Pension System) is an easy-to-invest, tax-efficient retirement scheme. Under the NPS scheme, you and your employer both can contribute to build a corpus for your post-retirement years, ensuring your social security and welfare.

The NPS account functions on a defined contribution basis and you need to invest in your pension account until you reach the superannuation age of 60. However, you can continue investing in NPS until 75. While the contribution to NPS is on a defined basis, the maturity amount doesn’t get any defined return or benefit, as the accumulated corpus entirely depends on the performance of underlying assets like equities and bonds.

The value of contributions, achieved investments, accumulation term, and deducted charges all play pivotal roles in determining the eventual benefit of the accumulated pension wealth, according to the Pension Fund Regulatory and Development Authority (PFRDA). In essence, if you aim for a substantial NPS corpus, you must make significant contributions and invest for a specified period.

Experts opine that the higher your investments and the longer the accumulation term, the greater the likelihood of accumulating a good pension corpus. NPS is a market-linked investment instrument that invests money into stocks, bonds and alternative funds. An NPS subscriber gets Rs 1.5 lakh tax deduction benefit (overall limit) under Section 80CCE of the Income-Tax Act. Additionally, the investor gets Rs 50,000 deduction benefit under Section 80CCD(1B) over and above the 80CCE.

Take a look at 5 major NPS changes over the years:

Changes in rules pertaining to final NPS withdrawals:

As mentioned earlier, the NPS is a retirement savings tool that allows final withdrawals for a subscriber when he or she reaches the age of 60. If the total corpus at the time of retirement is above Rs 5 lakh, the subscriber must use 40% of NPS corpus to purchase an annuity plan, with no tax applicable on this portion. However, the annuity payout will be subject to taxation based on the income tax slab the individual falls under.

The 60% of the NPS corpus accumulated can be withdrawn as a lump sum, which is also tax-free. Therefore, NPS enjoys an ‘exempt, exempt, exempt’ (EEE) status because investments, gains accumulated and final withdrawals are all tax-free.

Until FY 2018-19, the government allowed only 40% final withdrawal as tax free and would impose tax on the remaining 20%. However, in the next union budget (FY20), the government increased this tax-free withdrawal limit to 60% from 40%.

Equity allocation limit at 75%:

The NPS offers two investment options ‘Active’ and ‘Auto’ in the all citizen investment model. Under the ‘Active’ option, the NPS allows a subscriber to choose among various asset classes as well as the percentage of allocation.

On the other hand, under the ‘auto’ option, a subscriber will have to invest as per pre-defined matrix and he or she has no choice to select any asset class or percentage of allocation.

The ‘Active’ option allows you to decide among asset classes like equity, debt and alternative investment funds. However, there is a maximum equity investment limit of 75%. Until October 2022, if someone would choose the 75% equity investment option, it automatically decreased by 2.5% every year after the person reaches 50. Therefore, by the time the person turned 50, it would reduce to 50% equity exposure. The move was aimed at protecting investors from higher risks as they approach their retirement age.

However, in October 2022, this tapering of equity exposure was made optional. Therefore, now one can maintain a 75% equity allocation until 60 years of age.

100% equity allocation in tier-2 NPS account:

Till October 2022, the government allowed only a 75% equity exposure for subscribers of the tier-2 NPS account. However, this limit was raised to 100% equity allocation at that time.

Tier 1 Vs Tier 2 NPS accounts: The NPS Tier 1 account serves as the primary account for retirement savings, while Tier 2 offers flexible savings and withdrawal options. Tier 1 NPS is specifically designed for retirement planning and focuses on long-term investment. In contrast, Tier 2 NPS acts as a voluntary savings account and allows subscribers to withdraw funds as needed.

NPS withdrawals in a systematic manner:

In October 2023, the PFRDA introduced the systematic lump sum withdrawal (SLW) facility under the NPS, allowing subscribers to withdraw their funds in a systematic manner. SLW facility is not allowed on premature withdrawals of NPS money.

Allotment of units at the same day NAV:

In October 2020, Direct remittance (D-Remit) facility was started, allowing the NPS subscribers to get the same day NAV. Under the D-Remit facility, an investor gets the same-day NAV on his or her investments. The individual needs to register for a virtual account number for investments directly through a bank account.

The D-Remit process offers many advantages for NPS investors. Contributions received by the Trustee Bank (TB) before 9:30 a.m. are invested on the same day, which optimizes returns. Investors are allowed to set up periodical auto-debit payments like monthly, quarterly or half-yearly, which helps in building their retirement corpus in a hassle-free manner.