Normal exit

The NPS lets a subscriber take money out in two very different situations, and almost everything about the outcome depends on which one they are in.

Normal exit is the good one. It is the exit the scheme was designed for, at the point the subscriber was meant to reach.

Who qualifies depends on the model. A Government sector subscriber qualifies on superannuation or retirement from service. Under the All Citizen Model the test is 15 years of subscription or attaining 60 years of age, whichever is earlier. For a Corporate sector subscriber it is retirement or superannuation under their service rules or employment terms.

The reward for reaching it is a bigger lump sum. A Government subscriber may take up to 60 percent and must annuitise at least 40 percent. A non-Government subscriber may take up to 80 percent and must annuitise at least 20 percent.

Compare that with a premature exit, where only 20 percent comes out as cash.

The standard splits, by model.

The corpus-based relaxations. Below certain corpus levels the compulsory annuity is relaxed, because a small annuity is not worth buying.

Two special cases carry their own thresholds. A subscriber who joined on or after 60 may take the entire corpus up to Rs 12 lakh, and the 80/20 rule applies above it. For NPS-Lite and Swavalamban the full-withdrawal threshold is Rs 2 lakh.

Deferment, up to 85. A subscriber eligible for normal exit may continue in the NPS up to 85 years of age, or defer either the lump-sum withdrawal or the purchase of the annuity up to 85. During deferment the deferred portion continues to remain invested, but the subscriber is not permitted to contribute. Where both the lump sum and the annuity purchase are to be deferred, the subscriber may continue in the pension scheme instead of using deferment. The earlier requirement of giving prior intimation before superannuation has been removed, and exit may be exercised at any time during the deferment or continuation period. Expenses, maintenance charges and fees continue to apply throughout.

The default annuity, for the Government sector. Unless the subscriber specifically opts out, the contract is an annuity for the life of the subscriber and his or her spouse, with return of the purchase price. On the subscriber's demise, the annuity is re-issued to family members in a specified order at the premium rate prevailing at the time of that purchase, using the purchase price that was to be returned: first the living dependent mother, then the living dependent father. After all those family members are covered, the purchase price or the amount that was to be used for the annuity is returned to the surviving children, and in their absence to the legal heirs. A subscriber who wants a different annuity type must specifically opt for it.

Other mechanics. The Tier-II account is simultaneously closed on exit from Tier-I, and its balance paid out. Where a subscriber does not submit the withdrawal application within one month of attaining 60 or normal superannuation, the accumulated pension wealth in both Tier I and Tier II is monetised and kept separately per the Authority's guidelines, and the income earned from that safe keeping forms part of the subscriber's benefits. With effect from 1 April 2016 the withdrawal process is online only, through the CRA's Online Withdrawal module. The annuity must be bought from a PFRDA-empanelled Annuity Service Provider, the type is chosen at the time of exit, and once an annuity is purchased, cancellation and reinvestment with another provider or in another scheme is not allowed.

The tax layer. Chapter 7 adds two points. The 60 percent tax-free ceiling applies regardless of sector: although a Non-Government subscriber may now withdraw up to 80 percent as a lump sum, only the first 60 percent is tax-free and the portion above 60 percent is taxable. And the amount applied to buy the annuity is exempt at the time of purchase, but the annuity income received in later years is taxable in the year of receipt.

Four subscribers exit on the same day. Same event, four different outcomes.

Mrs Apte — Government sector, Rs 60,00,000, superannuating at 60. Above Rs 12 lakh, so the standard rule applies.

Lump sum, maximum = 60% of 60,00,000 = Rs 36,00,000
Annuity, minimum  = 40% of 60,00,000 = Rs 24,00,000

She does not fill in an annuity preference, so the default applies: a joint-life annuity for her and her spouse with return of purchase price, re-issued after both to her living dependent mother and then her living dependent father, with the purchase price finally returning to her surviving children.

Mr Bhonsle — All Citizen Model, Rs 60,00,000, turning 60. Same corpus, different model.

Lump sum, maximum = 80% of 60,00,000 = Rs 48,00,000
Annuity, minimum  = 20% of 60,00,000 = Rs 12,00,000

But the tax treatment does not follow the 80 percent. Only the first 60 percent — Rs 36,00,000 — is tax-free; the Rs 12,00,000 above it is taxable. His Rs 12,00,000 annuity purchase is exempt at purchase, and the pension he later receives is taxable in each year of receipt.

Ms Chitale — All Citizen Model, Rs 7,40,000. Under Rs 8 lakh, so the compulsory annuity falls away entirely. She may take the whole Rs 7,40,000 as a lump sum, or through SLW or SUR — or choose the standard 80/20 route if she would rather have a small annuity.

Mr Dandekar — All Citizen Model, Rs 10,50,000. In the Rs 8 lakh to Rs 12 lakh band.

Lump sum, maximum = Rs 6,00,000
Balance           = Rs 4,50,000 -> annuity, OR SUR over at least 6 years

Note that Rs 6,00,000 is 57 percent of his corpus, not 80 percent. Inside this band the cap is a rupee figure, not a percentage — which is exactly the trap. He may instead elect the standard route and take 80 percent, or Rs 8,40,000, with Rs 2,10,000 to annuity.

And one who does nothing. Mrs Apte's colleague superannuates and files no withdrawal application. After one month his corpus in both Tier I and Tier II is monetised and kept separately under the Authority's guidelines — and the income earned on that safekeeping is added to his benefits rather than lost.

Chapter 9, section 9.4, item 7 (PFRDA (Exits and Withdrawals under the NPS) Regulations 2015), gives the full sector-by-sector rules and corpus bands. Chapter 4, section 4.2.4, gives the same framework in the product chapter. Chapter 7, section 7.5, adds the tax treatment.

This is one of the most heavily examined blocks in the paper. Expect the split for each model (60/40 Government, 80/20 All Citizen and Corporate, 60/40 NPS-Lite), the Rs 8 lakh and Rs 12 lakh bands with the Rs 6 lakh lump-sum cap and the six-year SUR minimum in between, the eligibility test under the All Citizen Model (15 years of subscription or 60, whichever is earlier), the deferment limit of 85, and the default annuity order (spouse, then dependent mother, then dependent father, then surviving children, then legal heirs). The tax discriminator — only 60 percent is tax-free even where 80 percent may be withdrawn — is a favourite.

• The All Citizen test is 15 years of subscription OR age 60, whichever is EARLIER. Not later, and not 60 alone.
• 80 percent may be withdrawn, but only 60 percent is tax-free. The portion above 60 percent is taxable, in every sector. This is the single highest-value distinction in the chapter.
• In the Rs 8 lakh to Rs 12 lakh band the lump-sum cap is Rs 6 lakh, a rupee figure, not a percentage. On a Rs 10.5 lakh corpus that is 57 percent, not 80.
• The relaxed bands are options, not compulsions. In every band the subscriber may instead opt for the standard route.
• The Rs 12 lakh threshold for full withdrawal belongs only to subscribers who joined on or after 60. For everyone else full withdrawal stops at Rs 8 lakh, and for NPS-Lite and Swavalamban at Rs 2 lakh.
• No contributions during deferment, though the deferred portion stays invested and charges keep running. And prior intimation before superannuation is no longer required.
• The annuity choice is made at exit and cannot be undone. Cancellation and reinvestment with another provider or scheme is not allowed.
• The default annuity order is spouse, dependent mother, dependent father, then surviving children, then legal heirs — and it applies unless the subscriber specifically opts out.
• Tier II closes automatically when Tier I is exited, whether or not the subscriber applies.
• Do not confuse normal exit with premature exit, where the lump sum is 20 percent and the annuity 80 percent, with a full-withdrawal threshold of Rs 5 lakh.