How to withdraw from NPS by optimising tax and market fluctuations after 60

Idea concept featured image

Published: September 25, 2021 at 8:17 am

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).

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

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 Here, the subscriber has to buy an annuity for at least 40% of the accumulated corpus, and the rest can be withdrawn free of tax in one shot.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.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)