NPS Withdrawal Rules you must know- Explained by PensionBox

The National Pension System (NPS) is a quite popular retirement savings scheme among salaried individuals in India. It is a pension scheme launched by the government of India. It has been designed to provide retirement income to all the citizens of India. The goal is to encourage saving for retirement among Indian citizens. It is managed by the Pension Fund Regulatory and Development Authority (PFRDA). The key features of NPS include flexibility, low cost, and some impressive tax benefits. Knowledge of the withdrawal rules of the NPS is essential for every individual who contributes to the scheme because it helps them make informed decisions regarding their retirement funds.

In this article, we shall look at the NPS withdrawal rules that every subscriber needs to know. Read till the end to get full insights on the subject matter.

What is NPS?

The NPS (National Pension Scheme) is a great way to save for retirement. Anyone in the age group of 18–70 years, public or private employee, resident or non-resident, can become a part of the National Pension Scheme program. Section 80CCD(2) of the Income Tax Act covers the contribution an employer makes to an employee's NPS, which the employee can claim as a deduction in both tax regimes. Section 80C of the Income Tax Act covers the tax deduction of ₹1.5 lakh for self-contribution to the National Pension Scheme (old tax regime only, as is the 80CCD(1B) deduction that follows). Section 80CCD(1B) of the Income Tax Act covers the additional deduction of ₹50,000, which is allowed if a contribution is made towards the NPS.

What is the NPS withdrawal process?

• 1. Submission of application: The first step is to submit a partial withdrawal request to the Point of Presence (PoP), here Zerodha Broking Ltd, through PensionBox. Along with that, necessary documents supporting the reason for withdrawal must be attached while submitting.

• 2. Verification of documents: The PoP or PensionBox will then verify the documents submitted by the subscriber. This step makes sure that the withdrawal is being made for a legitimate reason.

• 3. Approval: When the verification process is completed, the withdrawal request will be approved. Then, the disbursed amount will be credited directly to the subscriber's registered bank account.

• 4. Notification: The subscriber will then receive a notification informing them of the approval and disbursement of the partial withdrawal. This keeps the subscriber informed about the status of their request.

NPS withdrawal rules

The NPS withdrawal rules aim at making sure that subscribers can properly and efficiently manage their retirement corpus while maintaining the integrity of the pension system at the same time. Different rules differ depending on the type of exit; for instance, at

• 1. retirement age
• 2. premature exit, or
• 3. In case of death

Withdrawal at retirement age

When the subscribers attain the age of 60, which is the standard retirement age for NPS, the following options are available to them:

• 1. Lump-Sum Withdrawal: Individuals have the option to withdraw up to 80% of the total accumulated corpus as a lump sum. Only up to 60% of the corpus taken as a lump sum is tax-free under the Income Tax Act. If an individual exceeds the lump sum withdrawal amount by 80%, then tax will be applicable on this amount.

• 2. Annuity Purchase: The NPS subscribers are obliged to use at least 20% of the corpus to buy an annuity from a PFRDA-approved insurance company. The objective behind it is that the annuity will offer a regular pension income for the lifetime of the individual. The amount used to purchase the annuity is tax-exempt, but the annuity income received is taxable as per the subscriber’s income tax slab.

Partial Withdrawals

Under the new rule, partial withdrawals are allowed under the NPS. However, there are specified conditions for partial withdrawals:

• 1. A minimum of three years in the NPS must be completed by the individual.
• 2. Partial withdrawals can be done by individuals for specific purposes, such as higher education of children, marriage of children, purchase or construction of a residential house, treatment of critical illnesses, or skill development.
• 3. Subscribers are permitted to withdraw up to 25% of their contributions. This does not include returns or your employer's contributions.

Withdrawal rule under NPS tiers I and II

NPS tier 1 account

The NPS tier I account is the primary pension account. The withdrawal rules from this account are strict to ensure a secure retirement corpus. Before the age of 60, you can make partial withdrawals after 3 years (up to 25% of your own contributions) or take a premature exit, which has no minimum holding period: a corpus up to ₹5 lakh can be withdrawn in full, and above that up to 20% as a lump sum with the rest used to buy an annuity. As the subscriber reaches 60 years of age, they can withdraw up to 80% of the accumulated corpus as a lump sum. The remaining 20% must be used to buy an annuity.

NPS tier 2 account

The NPS tier II account is voluntary. The withdrawal rules in this account are flexible. This allows the subscribers to withdraw funds whenever they want, without restrictions.

Withdrawal in the Case of Death

In the case of the death of an NPS subscriber, the nominee is eligible to claim the accumulated corpus. The whole corpus is paid to the nominee or legal heir, and there is no mandatory requirement to purchase an annuity. This amount is exempt from tax.

The NPS withdrawal rules are flexible and ensure a robust income after retirement. The withdrawal rules are designed to benefit subscribers so that they can enjoy their savings in their retirement years. For more knowledge on your finances, stay tuned at PensionBox