Should Senior Citizens Choose National Pension System (NPS) With New Rules?

The National Pension System (NPS) rule has been changed by the Pension Fund Regulatory and Development Authority (PFRDA), stating the maximum age of joining NPS has been increased to 70 years, from the previous 65 years. Any Indian Citizen, resident or non-resident, and Overseas Citizen of India (OCI) can join NPS. Additionally, the maximum age can be 75 at the time of maturity. PFRDA, in an official statement, commented, "In response to the large number of requests received from the existing subscribers to remain invested under NPS beyond 60 years or beyond their superannuation, and the desire from citizens above 65 years to open NPS, it has been decided to increase the entry age of NPS in the interest of Subscribers and benefit them with the opportunity of creating a long term sustainable pension wealth."

Equity exposure

Additionally, PFRDA now said, "The Subscriber, joining NPS beyond the age of 65 years, can exercise the choice of PF and Asset Allocation with the maximum equity exposure of 15% and 50% under Auto and Active Choice respectively. The PF can be changed once per year whereas the asset allocation can be changed twice." That means the authority has allowed subscribers to allocate up to 50% of the funds in equity who are joining NPS after 65 years, hence, it is a great opportunity for interested senior citizens.

Annuity and tax deduction

The pension scheme is observed by the account holder's NPS corpus that can be used to buy an annuity - a pension plan. The current annuity rate is 9%-10%, and the pension will be activated till the senior citizen's death. There is also a variant available where the person's heirs get back the purchase price, but the annuity rate for this pension variant is lower at 5%-6%. So, as the corpus increases, the pension will increase eventually. One cannot defer the annuity by more than three years, but the non-annuity part (60% of corpus) can be deferred till the age of 75 which means if a subscriber enters at the age of 60, the annuity will have to be bought at the age of 63.

However, many senior citizens stay away from the NPS because of the mandated annuity. But it should be remembered that one needs to use only 40% corpus to buy an annuity, and the remaining 60% corpus will grow till the age of 75. This can be withdrawn free of tax on maturity in a lump sum or 10 installments, which is called phased withdrawal, making it a lucrative option for senior citizens. Along with this opportunity, one can get a tax deduction of up to Rs. 2 lakh each year on contributions to the NPS, and also before maturity no tax is counted on NPS, only on maturity, it will be partially taxed.

Exit from NPS

Additionally, subscribers, beyond the age of 65 years can exit after 3 years, 'only at least 40% of the corpus should be utilized for the purchase of annuity and withdraw the remaining amount as a lump sum'. In case of premature exit, the subscriber should utilize at least 80% of the corpus for the purchase of the annuity. However, if an unfortunate death of the subscriber happens, the total corpus will be paid to the nominee.

However, senior citizens, who do not have any risk appetite, can invest in the senior citizen savings scheme or PMVVY with an assured rate of return, as it is less risky than NPS which does not offer guaranteed returns. Although regarding cost and taxation, mutual fund options are the closest competitors to NPS, but the latter is tax-free to the subscriber's heirs on death.