National Pension System: The Top 5 NPS Rule Changes You Need to Be Aware of in 2024

The National Pension System (NPS) is a tax-efficient retirement plan that is simple to invest in. Through the NPS program, you and your employer may work together to accumulate savings for the years after retirement, guaranteeing your welfare and social security.

 

You must continue to make contributions to your pension account until you reach the age of sixty-five, which is when the NPS account ends on a defined contribution basis. You may, however, keep making NPS investments until you are 75. Although the maturity amount receives no predetermined return or benefit, the NPS contribution is defined. This is because the success of the underlying assets, such as bonds and stocks, determines the overall corpus that is invested.

The Pension Fund Regulatory and Development Authority (PFRDA) states that the amount of contributions, realized investments, accumulation duration, and deducted costs are all important factors in determining the ultimate benefit of the accumulated pension wealth. To put it simply, you have to invest for a certain amount of time and make large contributions if you want to strive for a sizable NPS corpus.

According to experts, your chances of building up a healthy pension corpus increase with more investments and a longer accumulation period. NPS is a financial tool that links investors to the market and may be used to invest in bonds, equities, and alternative funds. As per Section 80CCE of the Income-Tax Act, an NPS subscriber is eligible for an overall tax deduction advantage of Rs 1.5 lakh. Apart from the 80CCE, the investor also receives a deduction advantage of Rs 50,000 under Section 80CCD(1B).

Modifications to the regulations for final NPS withdrawals:
As previously stated, the NPS is a retirement savings vehicle that permits subscribers to take their last withdrawals after they turn 60. If the subscriber’s entire corpus at retirement exceeds Rs 5 lakh, they have to utilize 40% of their NPS corpus to buy an annuity plan; this amount is tax-free. On the other hand, the annuity payment will be taxable according to the individual’s income tax bracket.

It is possible to withdraw the whole 60% of the NPS corpus in one single amount that is tax-free. Because of this, NPS is granted “exempt, exempt, exempt” (EEE) status with respect to its investments, cumulative profits, and ultimate withdrawals.

Only 40% of the total withdrawal was tax-free up to FY 2018–19; the remaining 20% was subject to taxation. Nevertheless, the government raised this tax-free withdrawal cap from 40% to 60% in the next union budget (FY20).

75% equity allocation limit: In the all-citizen investing model, the NPS provides two investment options: “Active” and “Auto.” The NPS gives subscribers the ability to choose from a range of asset classes and percentage allocations when they select the ‘Active’ option.

In contrast, a subscriber using the “auto” option will be forced to make investments based on a predetermined matrix and will not be able to choose the asset class or allocation %.

You may choose from a variety of asset types, including debt, equities, and alternative investment funds, by selecting the “Active” option. Nonetheless, a 75% maximum equity investment is allowed. The 75% equity investment option would automatically decline by 2.5% year when the individual turned 50 until October 2022. Consequently, the equity exposure would drop to 50% by the time the individual reached 50. The purpose of the action was to shield investors from increasing dangers as they got closer to retirement.

Nevertheless, this reduction in equity ownership was made voluntary in October 2022. As a result, until the age of 60, one may continue to have a 75% equity allocation.

100% equity allocation in tier-2 NPS account: Up to October 2022, members to the tier-2 NPS account were only permitted to have a 75% equity exposure by the government. At that time, nevertheless, the cap was increased to 100% equity allocation.

Tier 1 vs. Tier 2 NPS accounts: While Tier 2 provides more flexible choices for savings and withdrawal, Tier 1 is the principal account for retirement savings. Tier 1 NPS is intended primarily for long-term investments and retirement planning. On the other hand, Tier 2 NPS functions as an optional savings account that enables users to take out money as required.

Systematic lump sum withdrawal (SLW) under the NPS: In October 2023, the PFRDA launched this feature, which enables users to take out their money in a methodical way. When withdrawing NPS funds prematurely, the SLW feature is not permitted.

Unit allocation at same-day NAV: The Direct Remittance (D-Remit) option was launched in October 2020, enabling NPS members to receive the same-day NAV. Investors who use the D-Remit feature get the NAV of their assets on the same day. For investments made directly via a bank account, the person must register for a virtual account number.

For NPS investors, the D-Remit procedure has a number of benefits. In order to maximize profits, contributions received by the Trustee Bank (TB) before 9:30 a.m. are invested that same day. Investors may set up recurring auto-debit payments, such as half-yearly, quarterly, or monthly, which makes it easier for them to accumulate savings for retirement.