Last Updated on December 26, 2023 at 10:37 am
Mani asks, “Assume I have 10L in my corpus at the retirement age of 60 based on some NAV value of X. By the time I reach 60, assume there was a market crash and NAV for NPS has fallen drastically by 20%. So I choose the deferment option. After 3 yrs, the market is back to normal and if I chose to withdraw, will the NAV on that day will be used to calculate NPS total amount or will the NAV (X) as on the date at which I chose the deferred option be used to calculate the NPS total amount?”
“After going through all your blogs, there is still much-hidden information on NPS withdrawal. Can you write a blog detailing how to plan the NPS withdrawal so that we can avoid tax and also manage the market fluctuations?”
The NPS is a mutual fund. Therefore like, any mutual fund, only the NAV on the date of exit will apply to existing units for the calculation of the corpus. So in the case of deferrals, only the future NAV would apply.
Existing rules: There are three options when the subscriber reaches age 60 or is superannuated from his job (if the employer offers the NPS).
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Option 1: Normal exit. Here, the subscriber has to buy an annuity for at least 40% of the accumulated corpus, and the rest can be withdrawn free of tax in one shot.
Options 2: Continuation. Extend the time of withdrawal to any age between 61 and 75. The subscriber can continue to invest normally and get tax benefits as usual. This is a smart choice for those who do not need the NPS corpus immediately. An annuity purchased at an older age will offer a higher interest rate. Also, the total taxable income at older may be lower for some people. See: Higher annuity rates of LIC Jeevan Akshay applicable from Feb 2023
Option 3: This option has different choices, but no further contributions are allowed.
- Choice 1: Deferred Lump sum – (Lump sum part will be deferred till 75 years of age – No contribution is allowed)
- Choice 2 Deferred annuity – (The annuity part will be deferred for 3 years – No contribution is allowed)
- Choice 3: Defer Both – (Annuity will be deferred for 3 years & Lump sum will be deferred for 15 years, i.e. till 75 years of age – No contribution is allowed)
- Choice 4 Systematic Lump sum Withdrawal (SLW). The lump sum can be paid systematically on a periodical basis, viz monthly, quarterly, half-yearly or annually for a period until the age of 75 in an automated manner with a one-time request. Note: The annuity clause (minimum 40%) is still mandatory. This Systematic Lump sum Withdrawal (SLW) only applies to the remaining amount. Subscribers can either opt for annuity immediately or defer annuity till 75 years.
The exit option should primarily consider personal needs and not tax or prevailing market situation.
If the retiree is confident that she does not need the pension or lump sum money from NPS, extending the withdrawal age to 75 may be beneficial. If the retiree needs the annuity (pension) immediately but would like to withdraw the lump sum staggered, then option 4 of choice 3 may be beneficial. This can offer some protection against market fluctuations. Anyway, the withdrawals are tax-free.
An immediate annuity makes sense for those with significant employer contributions during their service. This would make NPS the retiree’s dominant fixed-income instrument like yours truly.
Extending annuity alone by three years (without contributions) may not be of significant use to retirees unless their main income will stop or reduce after three years.
More control of the market fluctuations can be obtained by carefully deciding NPS allocation. We have already shown why we should avoid equity (scheme E) in your NPS portfolio. A portfolio mix of gilt (G) and corporate bonds (C) can be quite rewarding in the long term.
Subscribers worried about credit risks can avoid corporate bonds and choose gilts. See for example: After 11 years of investing in the NPS (15% equity + 85% bonds) my return is 10%
Gilts or corporate bonds are also volatile (albeit not as much as stocks) and a staggered withdrawal (choice 4 of option 3) can offer a neat way to fight inflation after retirement.
Just because a product offers choices does not mean we have the luxury to choose. Young earners (whether they are part of the NPS or not) should strive to build a basket of retirement products and invest as much as possible aggressively in equity. See: How to build the ideal retirement portfolio.
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