Due Diligence. NPS gets cracking

A big grouse you would have had with the retirement product — national pension system (NPS) — has recently been addressed. Now, early withdrawal from the scheme has been made a bit simpler by the regulator.

Just as with the employee provident fund, where you are allowed to withdraw from your corpus for certain pressing reasons, the NPS too now allows you to take a portion of your amount out if you are in need. There has also been a modification to provide flexibility in withdrawing the corpus after retirement, with a provision to increase the tenure by three years.

The reasons for which early withdrawal are allowed are discussed here. But because it’s never a good idea to dip into your retirement kitty before time, here’s giving you some tips too.

Post-modification of the rules, you can withdraw 25 per cent of your contributions. Here, note that you can take out only a portion of the sums you invested and not 25 per cent of the value of the fund. Confused? Let’s say you invested ₹10,000 every month for a period of 10 years. You will be allowed to withdraw ₹3 lakh, which would be 25 per cent of your contribution. It doesn’t matter whether the value of your NPS investment is ₹15 lakh or any other amount; your withdrawal amount stays at ₹3 lakh. In the case of the provident fund, you are allowed to withdraw a portion of the fund value for specified reasons.

Two, you should have made contributions regularly for at least 10 years to be able to withdraw partially. Three, a total of three withdrawals are allowed. Four, there should be a gap of a minimum of five years between the time you make one withdrawal and the next.

The reasons for withdrawal are very specific — to meet expenses related to your child’s education, serious illness befalling you or your dependent family members (13 cases have been listed), building or purchasing your first house or for the marriage of your children.

The other key rule pertains to withdrawal of the corpus after retirement at 60. You will now be allowed to defer taking your annuity for a period of three years.

This could help if it so happens that in the year when you turn 60, the markets remain tepid or volatile. A deferral by three years may help you to recuperate from any erosion of funds. Of course, you are required to take an annuity policy for a minimum of 40 per cent of the accumulated corpus from an insurance company. Another concession has been made to relatively smaller investors. If the corpus at the time of withdrawal at 60 is ₹2 lakh or less, the entire amount can be taken out and no annuity policy needs to be taken.

Right now, the accumulated corpus and the annuity amounts are taxable. It remains to be seen if the government would bring it on par with other retirement products by giving it full tax exemption.

Being among the very few financial products that allows 50 per cent equity investment and is dedicated exclusively to retirement, the NPS is a must-have for investors. You should not withdraw from it before time.

This would be possible if you followed some simple financial planning steps.

Almost all the reasons for which early withdrawal is specified are long-term goals with at least a 10-15 year timeline.

So, if you start investing even at 35 years, most of these goals would be achievable if a balanced portfolio with investments in equity mutual funds, PPF, NSC and gold is created.

Take the case of higher education and marriage of children. You can build up the corpus gradually through funds or long-term debt products, such as PPF and Sukanya Samridhi.

For goals, such as building a house, you can buy land at affordable rates and construct your property with the help of a home loan and its attendant tax benefits. As for medical treatment, it would be a cardinal mistake not to have taken a medical cover with a family floater option.

Over the years, you must also pad this medical cover by taking a top-up to bolster the sum assured. There are also insurance policies that cover senior citizens. Take those to cover parents or in-laws, so that you don’t have to look elsewhere in case of emergencies.

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