PFRDA Seeks Tax Parity for NPS Payouts Ahead of Budget
Overview
The Pension Fund Regulatory and Development Authority (PFRDA) is urging the government to extend tax-neutral treatment to new National Pension System (NPS) payout options like systematic withdrawals. This proposal aims to provide investors with greater flexibility and potentially higher returns, moving beyond traditional annuities ahead of the Budget 2026-27. The regulator wants to ensure choices do not come with tax disadvantages.
PFRDA Pushes for Tax Parity in Pension Payouts
The Pension Fund Regulatory and Development Authority (PFRDA) has formally requested the government to grant tax-neutral status to newer National Pension System (NPS) payout options. This move is intended to align the tax treatment of products like systematic withdrawal plans (SWPs) with that of traditional annuities.
The regulator's proposal aims to prevent investors from facing tax penalties when choosing alternative retirement income strategies that better suit their individual financial needs and risk appetites. Currently, 60% of NPS withdrawals at retirement are tax-free, and the mandatory annuity portion is also exempt from tax at the point of investment.
Addressing Annuity Reluctance
Feedback from NPS subscribers indicates a growing disinterest in annuities, primarily due to their comparatively low returns and limited flexibility. In response, PFRDA has been developing supplementary payout products, including SWPs and direct unit redemptions, to complement existing annuity options.
PFRDA chairman Sivasubramanian Ramann highlighted that alternative structures like systematic withdrawals can potentially yield higher long-term returns. "We are working toward offering multiple payout options, giving retirees flexibility based on risk appetite and life expectancy," he told Financial Express.
Bridging the Tax Gap
The PFRDA seeks to ensure that the tax advantages offered to annuities are extended to other forms of pension withdrawals. "The objective is simple: provide choice without creating tax disadvantages," Ramann stated, confirming a formal representation has been made to the Finance Ministry.
This initiative arrives as recent policy adjustments have already allowed private-sector NPS subscribers to reduce their mandatory annuity component to 20%, enabling up to 80% of the corpus to be withdrawn, subject to existing tax rules. Extending tax parity to SWPs would allow retirees to split payouts, perhaps 20% annuity and 20% SWP, without incurring immediate tax liabilities, thereby enhancing their retirement planning flexibility and outcomes.
