The National Pension System (NPS) lets people over 60 plan for a stress-free life after they retire. Anyone can opt for this scheme and make a normal exit by utilising at least 40% of their corpus to purchase an annuity plan. The remaining 60% can be withdrawn as a lump sum. In this blog, you will learn about the various rules associated with NPS exit and methods set for all NPS subscribers.
In the beginning, the NPS scheme was only restricted to Central Government employees till May 1, 2009. The program is now run by the Pension Fund Regulatory and Development Authority (PFRDA). Later, it was opened up to the private sector. At present, any Indian citizen (including NRIs) can open an NPS account if their age is between 18 and 70 years.
Have you ever thought about what would happen to your hard-earned NPS savings if you suddenly died? A lot of subscribers don’t think about this question, but it’s very important for making sure your family has money in the future. As someone who has spent years studying pension plans, I think it’s important to know about the death benefits of NPS in order to properly plan your estate.
Understanding NPS Death Benefits: The Basics
The National Pension System (NPS) is an investment plan run by the government that lets members choose how to spread their money among different types of assets. What does it mean when a subscriber dies? Let’s make it easy to understand.
Follow the rules set by the Pension Fund Regulatory and Development Authority (PFRDA) for how the accumulated pension wealth is distributed when an NPS subscriber dies. The distribution process varies depending on when the death occurs:
- Death before retirement (before reaching 60 years)
- Death after retirement (after 60 years but before annuity purchase)
- Death after taking lumpsum (but before annuity purchase)
- Death after annuity purchase
Let’s explore each scenario in detail.
Death Before Retirement: What Your Nominees Get
If a subscriber dies before reaching the age of 60 (normal retirement age for NPS), the entire accumulated pension wealth is paid to the nominee(s) or legal heir(s). The nominees have two options:
Option 1: Withdraw the entire amount
- The entire 100% accumulated pension wealth can be withdrawn in one go
- No mandatory requirement to purchase an annuity
- The amount is directly credited to nominee’s bank account
Option 2 Purchase an annuity
- Nominees can voluntarily choose to purchase an annuity
- They can decide what percentage to use for annuity purchase
- The remaining amount is paid as lumpsum
We’ve seen several cases where families were unaware of these options and lost out on timely benefits. Don’t let that happen to your loved ones!
Death After Retirement but Before Annuity Purchase
This is where things get a bit complicated. If a subscriber dies after turning 60 but before buying an annuity, the rules for distributing the money depend on the type of subscriber:
For Government Employees:
- Minimum 80% of accumulated wealth must be used to purchase annuity
- Annuity MUST be purchased by the spouse providing lifetime income
- Annuity must have Return of Purchase Price (ROP) option
- Maximum 20% can be taken as lumpsum by nominees
For Citizens and Corporate Subscribers:
- Minimum 40% of accumulated wealth must be used to purchase annuity
- Annuity MUST be purchased by the spouse providing lifetime income
- Annuity must have Return of Purchase Price (ROP) option
- Maximum 60% can be taken as lumpsum by nominees
Death After Taking Lumpsum But Before Annuity Purchase
This is a specific scenario that many people overlook. PFRDA has issued clear guidelines for this situation.
If a subscriber has taken their lumpsum amount (20% for govt employees or 60% for citizens/corporate) but dies before purchasing the mandatory annuity, the amount meant for annuity would still be lying in the Central Record Keeping Agency (CRA) system.
In such cases
- Annuity SHALL MANDATORILY be purchased by the spouse (if any)
- The annuity must provide income for life with Return of Purchase Price option
- If spouse later dies, the annuity gets re-issued to family members in this order:
- Living dependent mother of deceased subscriber
- Living dependent father of deceased subscriber
If there are no family members as specified above, the purchase price is returned to:
- Surviving children of the subscriber
- In absence of children, to other legal heir(s) of the subscriber
I’ve personally seen families struggle with this process because they weren’t aware of these rules. Getting the documentation right is critical here!
Death After Annuity Purchase: What Happens to Monthly Pension?
Once the annuity is purchased, the terms depend on the annuity option selected by the subscriber:
Common Annuity Options and Death Benefits:
| Annuity Option | What Happens After Death |
|---|---|
| Lifetime income for subscriber only | Payments stop, no return to nominees |
| Lifetime income with return of purchase price | Payments stop, nominees get back the purchase price |
| Joint Life annuity with spouse | Payments continue to spouse, stop after spouse’s death |
| Joint Life with return of purchase price | Payments to spouse, purchase price returned after spouse’s death |
The most popular choice (and often mandated in death cases) is the “Return of Purchase Price” option as it ensures the capital amount returns to the family.
NPS Tier 2 Account After Death
Many subscribers have both Tier 1 (pension account) and Tier 2 (investment account) under NPS. For Tier 2 accounts:
- The entire balance in Tier 2 account is paid to nominee(s)
- No annuity purchase requirement
- No tax implications on withdrawal due to death
- Process is typically faster than Tier 1 claims
Documents Required for NPS Death Claim
To ensure your family doesn’t face delays in getting the death benefits, they’ll need to submit:
- Death certificate of the subscriber
- KYC documents of the nominee (ID & address proof)
- Bank account details of nominee with cancelled cheque
- Duly filled claim forms (Form 601-PW for premature exit)
- Legal heir certificate (if no nominee is registered)
- Guardian details (if nominee is minor)
Pro tip: Keep all your investment documents, including your PRAN (Permanent Retirement Account Number) details, in a file that your family can easily access in case something happens to you.
Processing Timeline for NPS Death Claims
The timeline for processing death claims is:
- Submission of documents to the nodal office/POP: Day 0
- Verification and forwarding to CRA: 3 working days
- Processing by CRA: 3 working days
- Fund transfer to nominee’s account: 3-4 working days
In total, it takes approximately 10-15 working days for nominees to receive the funds if all documents are in order.
Tax Implications on NPS Death Benefits
There’s good news on the tax front! Death benefits from NPS enjoy significant tax advantages:
- Lumpsum amount received by nominee is completely tax-free
- Purchase of annuity from death proceeds is tax-free
- Income received from annuity is taxable in nominee’s hands
- No TDS on lumpsum withdrawal due to death
Common Problems Faced by Nominees
During my research, I’ve observed several common issues that nominees face:
- Lack of awareness: Many families don’t know about the NPS benefits after death
- Missing nomination: Subscribers forget to update nominations
- Documentation hassles: Incomplete paperwork leading to delays
- Annuity confusion: Not understanding the mandatory annuity purchase requirements
Steps to Ensure Smooth Transfer of NPS Benefits
To ensure your family doesn’t face difficulties in claiming your NPS benefits:
- Update your nomination details regularly
- Inform your nominees about your NPS investment
- Keep your KYC information current
- Document your PRAN and login details securely
- Consider writing a letter explaining your NPS investments
- Review and update beneficiary details after major life events
Special Case: NPS Corporate Subscribers
For corporate subscribers, the process has some unique aspects:
- The corporate nodal officer initiates the claim process
- Verification happens at corporate level before submission
- Faster processing timeframes in many cases
- Option for corporate to facilitate annuity purchase
Recent Changes in NPS Death Benefit Rules
PFRDA has recently clarified several aspects of death benefits:
- NPS Trust, POPs, Corporate and Nodal Officers must engage with claimants of deceased subscribers
- Monitoring progress to ensure timely processing of death claims
- Special focus on cases where lumpsum was taken but annuity not purchased
- Enhanced grievance handling for death claims
Understanding what happens to your NPS after death is essential for ensuring your family’s financial security. While we don’t like thinking about our mortality, proper planning can save your loved ones from financial stress during an already difficult time.
By keeping your nominations updated, informing your family about your investments, and understanding the distribution process, you can ensure your hard-earned pension wealth serves its intended purpose even after you’re gone.
Remember, the rules might seem complex, but they’re designed to provide long-term financial security to your dependents. And isn’t that what we all want – to take care of our families even when we’re not around?
Have you updated your NPS nomination recently? If not, maybe it’s time to log into your NPS account and make sure everything is in order. After all, it’s not just about saving for retirement—it’s about creating a legacy that provides for your loved ones.
Roadmap to NPS Exit and Withdrawal After Death
When an NPS subscriber dies the entire pension amount is disbursed to the legal heirs or nominees. Instead of taking the whole amount as a lump sum, the nominee may purchase an annuity too. For that, they must specify the annuity scheme in Death exit form.
1 How Does the Pension Process Start Under NPS?
The pension procedure starts immediately after the Annuity Service Provider receives your annuity plan purchase amount.
The ASP gets the claimant’s documents and Exit request via the CRA and verifies them to issue the annuity policy. Should the subscriber need to take any further action, the relevant ASP will get in touch with the applicant. You can eventually initiate a communication too from your end via the annuity provider’s official website.
What happens to your annuity when you die?
FAQ
Can we take 100% annuity from NPS?
On the death of the primary annuitant, secondary annuitant will receive 100% of original annuity throughout life.
What happens to pension contributions after death?
In the absence of family member on the date of the death of the member (before eligibility for member pension), the family pension is payable to nominee and in the absence of a valid nomination it is payable to dependent father followed by dependent mother.
What happens to a person’s pension after death?
If someone dies, their pension may go to their estate or to their spouse, partner, or another person they named as a beneficiary. This depends on the type of pension and the person’s age. The type of pension (like defined benefit, defined contribution, or State Pension) and whether payments had started before death are key factors in what happens to the pension.
What happens to your pension fund after death?
It is payable to the beneficiaries of the deceased member or, if there are no beneficiaries, to the member’s estate. Death after becoming a pensioner: Retirement or discharge annuities are guaranteed for five years after a member has retired.
Does NPs have a death benefit?
Yes, NPS (National Pension System) has a death benefit in the form of a lump sum payment to the nominee or legal heir of the subscriber in case of the subscriber’s death. What happens in the case of the death of a subscriber before exit from NPS?.
What happens if a subscriber dies before exiting NPS?
In the case of the death of a subscriber before exit from NPS, the nominee or legal heir of the subscriber is entitled to receive the accumulated pension wealth as a lump sum or annuity, as per the subscriber’s choice. What is the death gratuity under NPS?.
How do I claim a death in NPS?
To claim an NPS death claim, the nominee or legal heir of the subscriber needs to submit a claim form along with the required documents, such as the death certificate, identity proof, and bank account details. Does NPS give a lifetime pension? Yes, NPS provides a lifetime pension to the subscriber in the form of an annuity.
Who is the beneficiary of NPS funds if a subscriber dies?
In the unfortunate circumstance of the subscriber’s death, the automatic beneficiaries of the NPS funds are the registered nominees at the Central Recordkeeping Agency (CRA).
What is death gratuity under NPS?
This is a lump sum payment made by the NPS to the subscriber’s nominee or legal heir in the event of their death. The amount of the death gratuity is equal to the entire accumulated pension wealth of the subscriber. What happens to pension contribution after death?.
Can NPS be withdrawn after retirement?
Once an investor turns 60, up to 60% of the corpus in Tier I accounts can be withdrawn as a lump sum. The remaining 40% has to be used to buy annuity products that will be used to pay post-retirement pension. However, in case the pension corpus is less than Rs. Does NPs have a death benefit?.