5 Key Changes in NPS Rules Every Investor Should Know

The National Pension Scheme (NPS) is a popular investment option in India, designed to provide a secure and stable income post-retirement while offering substantial tax benefits. As with any financial product, keeping up-to-date with the latest rules and regulations is crucial. Here’s a comprehensive overview of the recent changes in NPS rules that every investor should be aware of.

Launched by the Government of India in January 2004, the National Pension Scheme was initially available only to government employees. However, since 2009, NPS has been extended to all Indian citizens. The scheme aims to ensure a steady income post-retirement and offers potential growth on the invested amount, making it a viable option for long-term wealth accumulation and retirement planning.

1. Increased Administrative Costs

One notable change in the NPS rules is the marginal increase in administrative charges. The NPS Trust has approved the recovery of administrative expenses at a rate of 0.005% of the Assets Under Management (AUM) per annum. This adjustment aims to cover the increased costs associated with managing and administering the scheme.

2. Contribution Requirements

Contributions to the NPS can be made regularly throughout an individual's employment. For Tier I subscribers, the minimum contribution is now set at Rs. 6,000. On the other hand, Tier II subscribers, who use this account as a voluntary savings option, have no minimum contribution requirement but can contribute as little as Rs. 250 per transaction. This flexibility allows investors to manage their contributions according to their financial capacity.

3. Changes in Withdrawal Rules

The withdrawal rules for NPS have seen some updates:

• Tier I Accounts: Upon retirement, account holders can withdraw up to 60% of the accumulated corpus in lump sum. The remaining 40% must be used to purchase an annuity. In the event of the account holder’s death before the age of 60, the entire corpus will be paid to the nominee or legal heir.
  
• Tier II Accounts: These accounts offer greater flexibility, allowing investors to withdraw the invested amount as needed.
  

For pre-mature exits, where the total NPS corpus is less than or equal to Rs. 2 lakh, individuals can opt for a 100% lump sum withdrawal. If exiting before age 60, at least 80% of the corpus must be used to buy an annuity, with the remainder available for withdrawal. Note that premature exits are only permitted after ten years of account maintenance.

4. Adjusted Fund Manager Fees and Investment Options

There has been a nominal increase in the fees charged by NPS fund managers, rising from 0.01% to 0.09%. This adjustment supports the financial sustainability of fund management. Additionally, fund managers now have the opportunity to invest in Initial Public Offerings (IPOs) and select from a broader range of over 200 stocks, offering more diverse investment options.

5. Enhanced Tax Benefits and Flexibility

Recent updates have also improved tax benefits and flexibility for NPS subscribers:

• Tax Exemption: The Income Tax exemption on NPS withdrawals has been increased to 60%. This means that investors can now enjoy tax-free withdrawals on up to 60% of their maturity amount. Additionally, for Central Government employees, the tax exemption under Section 80CCD(2) has been revised to allow up to 14% of the employer's contribution of salary, up from the previous 10%.
  
• Greater Flexibility for Government Employees: Central Government employees now have increased flexibility in choosing pension fund managers. They can select a combination of equity and debt funds beyond the earlier 15% cap. Furthermore, voluntary contributions to Tier II accounts, if locked in for three years, qualify for tax exemption under Section 80C.

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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action.