Superannuation is a retirement savings scheme where your employer sets aside funds on your behalf throughout your career. But here’s the catch—when you retire, you’re allowed to withdraw only one-third of the total amount as a lump sum. The remaining two-thirds are locked into an annuity, which offers you a modest monthly income, often limiting your financial freedom when you need it most.
But, there’s a smart workaround—you can exercise the one-time option to transfer your entire superannuation corpus to a National Pension System (NPS) account.
Also, keep in mind that retirement age under your employer’s plan may differ from the NPS’ retirement age, which could complicate withdrawals if not planned carefully.
One-time tax-free transfer
The Pension Fund Regulatory and Development Authority (PFRDA) allows a one-time transfer of the superannuation corpus to an NPS Tier-1 account without paying any tax. Employees using this facility can withdraw up to 60% of their corpus tax-free at 60, compared with just 33.33% allowed under a superannuation scheme.
“The government allows a one-time voluntary transfer of superannuation funds to the NPS, which is tax-neutral since such transfers enjoy exemption under Section 10(13) of the Income Tax Act. By switching to the NPS closer to the retirement date, an employee can withdraw up to 60% of their corpus, compared to only 33% under a superannuation fund,” said Abhishek Kumar, registered investment advisor and founder of financial advisory firm Sahaj Money.
Illustration: How it works
Let’s take the case of Mr A, a 59-year-old employee with ₹50 lakh in his employer-maintained superannuation fund. If he chooses to do nothing at retirement, he will receive only ₹16.5 lakh (33%) as a one-time payout. The remaining ₹33.5 lakh will be locked into an annuity plan, which may offer payments for life or a fixed term, with or without principal repayment—often leaving little room for flexibility.
But there’s a smarter way. By transferring the entire ₹50 lakh corpus into a NPS Tier-1 account, Mr A can access ₹30 lakh (60%) as a lump sum, completely tax-free. The remaining ₹20 lakh can then be invested in annuity plans, giving him far greater financial freedom and choice.
“Most employees who still hold a superannuation fund as they head towards retirement date open an NPS account (prior to date of retirement) and shift the corpus from superannuation to NPS – this is allowed to be done without any tax implication – and enjoy the superior benefits that NPS offers,” said Sriram Iyer, CEO, HDFC Pension.
Adarsh Vir Singh, founder of social security consulting firm Nidhi Niyojan Inc., also pointed out that when superannuation funds buy annuities, they have to pay GST on them, whereas if the subscribers get annuities through NPS, GST is not applicable.
“Another important point to consider is that if superannuation funds are maintained by LIC, then LIC charges a hefty fee on the fund switching from superannuation to NPS, and this levy directly hits employees’ superannuation corpus,” added Singh.
Tax advantage and more
If you’re planning to change jobs, transferring your superannuation corpus to the NPS early can help you avoid locking it into an annuity with limited control. Normally, when you switch employers, you can move your superannuation fund from the previous employer’s trust to the new one using physical forms.
However, many companies don’t have a superannuation trust in place. In such cases, employees are left with no option but to withdraw their funds.
When you withdraw early, you’re allowed to take only one-third of the corpus as a lump sum, while the remaining two-thirds must be used to purchase annuity plans. Both the lump sum and the annuity payments are fully taxable—resulting in a significant tax hit that could have been avoided by transferring the corpus to NPS before leaving your job.
“Let’s say a 28-year-old employee switches jobs from company A to company B, and the new employer doesn’t have a superannuation trust. In such cases, he would have to withdraw one-third by paying full tax and will start receiving a pension through annuities at 28. This is not ideal as he would pay tax on the one-time withdrawal of one-third of the corpus and would be forced to buy annuities from the remaining amount,” said Amit Gopal, a pension consultant based in Bangalore.
NPS also offers more investment flexibility and options. Employees can choose fund managers, invest in diverse assets, and continue contributing even after switching to freelance or self-employed work through the ‘all citizens model.’
According to PFRDA, employees must have an active NPS Tier-1 account to initiate the transfer. The account can be opened via Points of Presence (PoPs), through the eNPS portal, or via the employer if enrolled.
The employees have to then approach the superannuation fund trust through the current employer and make a request to transfer the corpus to NPS. PFRDA says it’s the responsibility of the superannuation fund trust to then initiate the transfer.
“For the SA balance to shift from the trust to NPS, the rules of the trust should provide for the same. If not, the trust deed has to be amended and approval obtained from the Income Tax Dept,” said Gopal.