Premature exit

Leave the NPS early and the arithmetic turns against you.

A premature exit is any exit before the qualifying event that would have made it a normal exit. For a Government sector subscriber the workbook gives the example: exit before attaining the age of superannuation or retirement, such as on resignation or other permitted closure of the individual pension account.

The split reverses. On a normal exit a non-Government subscriber takes up to 80 percent as cash. On a premature exit any subscriber takes up to 20 percent, and at least 80 percent must go into an annuity.

That is the scheme keeping its promise to itself. The money was contributed for old-age income, so taking it out early does not convert it into spendable cash — it converts it into a pension that starts early and is therefore small.

One relief exists. Where the corpus is up to Rs 5 lakh, the whole amount may be taken out.

The standard split, and it is the same across sectors.

This applies to Government sector subscribers exiting before superannuation or retirement, and to All Citizen and Corporate sector subscribers alike.

The corpus relaxation.

For NPS-Lite and Swavalamban subscribers exiting before 60, the split is the same 20 percent / 80 percent, but the full-withdrawal threshold is Rs 2 lakh rather than Rs 5 lakh.

Where premature exit does not exist. For subscribers who join the All Citizen Model on or after attaining 60, the earlier requirement of completing three years from the date of joining for a normal exit has been removed. Because the vesting period has gone, the concept of premature exit before completion of three years is not applicable to them.

Contrast with the thresholds on the other side. The full-withdrawal thresholds differ between the two exits, and that is the most reliable examinable contrast in the section:

Why it is a poor way to raise money. Chapter 8 spells out the consequence for a retiree thinking of clearing debt from the NPS. While accumulating, a subscriber in the scheme at least three years may take a partial withdrawal of up to 25 percent of his or her own contributions for specified purposes — a limited route that does not close the account. A full exit before 60, however, is a premature exit, under which at least 80 percent must compulsorily buy an annuity and only up to 20 percent may be taken as a lump sum. The workbook's conclusion is blunt: drawing on the NPS to clear debt before retirement is heavily constrained and generally inadvisable; the corpus is best preserved for its purpose.

Mechanics that carry over from a normal exit. The annuity must be bought from a PFRDA-empanelled Annuity Service Provider, the type is chosen at the time of exit, and once purchased it cannot be cancelled and reinvested elsewhere. The Tier-II account is simultaneously closed on exit from Tier-I. And withdrawal is processed online through the CRA's module, as it has been since 1 April 2016.

Migration is not exit. Migration of a Swavalamban subscriber to any other pension scheme of the Government of India, as approved by PFRDA, shall not be treated as exit and withdrawal for the purpose of these regulations.

Mr Gaikwad, 43, has an NPS corpus of Rs 26,00,000 and a business loan of Rs 9,00,000 he wants to clear. He resigns from service and applies to close the account.

What he actually gets

Lump sum, maximum = 20% of 26,00,000 = Rs 5,20,000
Annuity, minimum  = 80% of 26,00,000 = Rs 20,80,000

He needed Rs 9,00,000 and can access Rs 5,20,000. The remaining Rs 20.8 lakh buys an annuity that begins paying him at 43 and must therefore stretch across the rest of his life — a far smaller monthly figure than the same corpus would have produced at 60, and once bought it cannot be cancelled or reinvested.

He has destroyed a retirement corpus and still has not cleared the loan.

The route he should have used. He had been an NPS subscriber for eleven years, so he was eligible for a partial withdrawal of up to 25 percent of his own contributions, for a specified purpose, without closing the account. That is the limited door Chapter 8 points to, and it leaves the corpus and the account alive.

Three colleagues, three different answers on the same day

Mr Gaikwad and Mr Joshi hold identical corpora. The only difference is seventeen years, and it moves Rs 15,60,000 from one column to the other.

And one for whom the question does not arise. Mrs Kale joined the All Citizen Model at 63. The three-year vesting requirement for a normal exit has been removed for subscribers joining on or after 60, so premature exit before completion of three years is not applicable to her at all. She exits as a normal exit, with up to 80 percent as a lump sum — and with her corpus of Rs 11,00,000 being under Rs 12 lakh, she may take the whole of it.

Chapter 9, section 9.4, item 7, gives premature exit for each sector with the Rs 5 lakh relaxation and the Rs 2 lakh NPS-Lite figure. Chapter 4, section 4.2.4, restates the standard requirement. Chapter 8, section 8.1.1, applies it to the debt-repayment question and calls the route generally inadvisable.

Expect the 20 percent / 80 percent split asked directly, and the contrast with the normal-exit splits. Expect the Rs 5 lakh full-withdrawal threshold, which is the figure most often confused with normal exit's Rs 8 lakh. Expect a scenario question in which a subscriber wants money before 60 — the answer is the partial withdrawal of 25 percent of own contributions after three years, not a premature exit. And expect the point that migration of a Swavalamban subscriber to another Government scheme is not an exit.

• 20 percent out, 80 percent to annuity — the reverse of a non-Government normal exit. Getting the direction wrong is the most common error in the exit chapter.
• Rs 5 lakh is the premature-exit threshold. Rs 8 lakh is the normal-exit threshold. And Rs 12 lakh, Rs 6 lakh and Rs 2 lakh all belong to other rows. Learn which figure goes with which exit.
• The split is the same across sectors on a premature exit. Unlike a normal exit, there is no 60/40 versus 80/20 distinction here.
• A partial withdrawal is not a premature exit. It takes up to 25 percent of the subscriber's own contributions after three years, for specified purposes, and the account stays open.
• For subscribers joining on or after 60, premature exit before three years does not apply — the vesting period has been removed.
• The annuity bought on a premature exit starts early and cannot be undone. The type is chosen at exit and cancellation or reinvestment with another provider is not allowed.
• Tier II closes simultaneously on exit from Tier I, premature or not.
• Swavalamban migration to another approved Government scheme is not treated as exit and withdrawal, so no exit rules apply to it.