By Venkatasubr

Copyright thehindubusinessline

The pension fund regulatory and development authority (PFRDA) has made a series of proposals that seek to make the National Pension System (NPS) more attractive to the private sector staff, self-employed and gig workers.

One circular, which gives a new framework for investments, is to come into effect from October 1. The other is an exposure draft on annuitisation and exits, which is open for suggestions till October 17 (can give link where people can give their suggestion). The key aspects from the circular and exposure draft are discussed here with potential implications for NPS private sector subscribers.

More options for subscribers

In the circular, the pension fund regulator has proposed a new multiple scheme framework (MSF).

Essentially, this proposal means that NPS subscribers can invest in more than one scheme of pension fund managers who will be allowed to roll out new funds apart from the ones they currently manage. These pension fund managers can have two funds in each category with one being high-risk and the other being moderate risk. The schemes will be offered to subscribers after a suitable risk-profiling process.

Also, the PFRDA has allowed 100 per cent investment in equity under this MSF, up from a maximum of 75 per cent currently allowed in its existing schemes.

An existing subscriber can continue to invest in the current schemes and also opt for these new offerings. Multiple schemes are allowed for investment under a single PAN.

These new schemes will have a 15-year lock-in. If there is prolonged underperformance and subscribers wish to switch, they may do so only to existing NPS schemes and not to other newly proposed funds.

In the pipeline

Two proposals from the exposure draft are quite important and seek to address longstanding demands of subscribers.

The first proposal is to reduce the compulsory annuitisation part of the accumulated NPS corpus from 40 per cent currently to 20 per cent.

The second proposal seeks to give exit from the NPS after 15 years, even if the subscriber is not yet 60. This proposal takes off from the earlier circular on 15-year lock-in for the new schemes to be launched by pension fund managers.

Implications and tax clarifications

Now, the proposal to have new schemes and limit minimum period of lock in to 15-years, purportedly to make it attractive for those in the private sector may be good for some investors, but not all.

For those employees who earn large incomes and with the ability to invest heavy sums even in their 20s and 30s, and wishing to FIRE (financial independence, retire early), the proposal may be welcome. Of course, this is assuming they have other investments as well apart from those made in the NPS.

In the case of those earning moderate incomes with low disposable investment surpluses, 15 years may not suffice to accumulate a healthy corpus for retirement.

The proposal to go all-in with 100 per cent equity may work as a high-risk strategy, though any correction in the equity markets in the year of retirement could hurt the corpus. Not allowing switches with other new schemes in case of underperformance is a challenge. So, selection of funds must be done very carefully, though that is not easy with new scheme launches.

NPS as a retirement vehicle is designed to create a balanced portfolio with allocations across asset classes.

The other two proposals related to a 15-year lock-in and the requirement to annuitise only 20 per cent of the accumulated corpus need some clarity on the taxation front,

For example, in the case of those exiting after a 15-year lock-in, but before the age of 60 or superannuation, what are the tax implications?

Currently, those exiting the NPS before 60 are required to annuitise at least 80 per cent of their accumulated corpus (unless the total amount is ₹2.5 lakh or less).

In the case of a subscriber who has turned 60 and has decided to withdraw 80 per cent of the corpus, will 60 per cent of the accumulated amount be tax free and the additional 20 per cent become taxable?

Published on September 19, 2025