The National Pension Scheme (NPS) is a notable government-backed retirement savings scheme that is designed to help mobilize a part of a subscriber’s income to build a robust corpus for retirement. Notably, the scheme is a voluntary plan that is open to citizens, including those working in private, public, and unorganized sectors. However, the scheme is not available to the armed forces in India. The scheme is designed to encourage individuals to put their money into pension accounts while they are working to help build a reliable corpus for their retired life.
Post-retirement, the subscribers of NPS are allowed to withdraw a part of their saved money as a lump sum and get the remainder as a monthly payout.
The NPS was actually launched for the central government employees but subsequently, the plan was made available to everyone.
Notably, individuals are allowed to port the NPS scheme across different locations and jobs. The NPS subscribers can enjoy tax benefits under the provisions of Section 80C and Section 80CCD of the Income Tax Act, 1961. NPS has several benefits for the subscribers. However, to make the most of this savings scheme individuals must become familiar with its key aspects, especially the NPS withdrawals and tax benefits.
That said, let’s learn more about NPS withdrawals and tax benefits to plan your savings into the scheme better.
Rules for National Pension Scheme Withdrawal or Early Exit
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After Superannuation
Following Superannuation at 60, NPS subscribers are required to utilize 40% of their corpus to avail of an annuity for retirement. This arrangement would allow them to provide them with a regular monthly income. The remainder of the savings can be withdrawn as a lump sum.
Notably, when the saved corpus is equal to Rs. 5 lakh or less, subscribers are allowed to dip in and withdraw the money at a to.
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Premature exit
When the NPS subscriber exits the scheme before they retire at 60, individuals must use 80% of their corpus to buy an annuity. Typically, an annuity is a kind of insurance that extends regular income flow to the subscribers for life. However, if their savings for pension is equal to or less than Rs. 2.5 lakh NPS subscribers can withdraw the savings as a lump sum.
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Following the death of the NPS subscriber
After the insured’s sudden passing, the full sum is paid to their legal heir or nominee. It is always advised to gain all the required information about withdrawals and the accompanying process to ensure a smooth experience.
National Pension System Withdrawal Post Retirement
New National Pension Scheme guidelines state that retired subscribers can withdraw up to 60% of their NPS corpus but as a lump sum. The remainder will go straight towards their choice of annuity plan. This is why it is recommended to check different life insurance quotes to pick the suitable annuity. It should be noted that in case the chosen corpus is either less than or equal to Rs. 5 lakhs subscribers can withdraw the entire sum without getting any annuity. Additionally, such withdrawals will not attract any taxation.
However, if the subscriber’s NPS savings are more than Rs.10 lakhs, they can make tax-free withdrawals only up to Rs. 6 lakhs. With the remaining sum, individuals must buy an annuity plan that can help them generate a stream of income as a pension. It should be noted that these withdrawals are tax-free but the annuity plan attracts taxation based on the subscriber’s income tax slab.
National Pension Scheme Tax Benefits
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Employee tax deductions on their contribution
Individuals who self-contribute to NPS account are allowed to claim the following tax benefits on their part of contributions –
- Tax deduction up to 10% of the pay, which comprises Basic and DA under the Income Tax Act’s Section 80CCD (1). Note that this is capped at Rs.1.5 lakh under the tax provision of Section 80CCE
- Tax benefits of up to Rs.50,000 in a year under the Income Tax Act’s Section 80CCD (1B).
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Employee tax benefits on their employer’s contributions
An employer’s contribution towards the National Pension System account of their employee is considered eligible for tax benefits of up to 10% of their total salary, comprising basic and DA, or 14% of the salary if the contribution by the Government under Section 80CCD (2) beyond the Rs.1.5 lakh limit applicable under Section 80CCE.
Tax Reliefs for Self-employed Subscribers
Self-employed subscribers with NPS accounts can claim the following tax reliefs on their contributions –
- Tax deduction of up to 20% of the gross income under Section 80CCD (1). However, they can claim only up to the limit of Rs.1.5 lakhs per annum under Section 80CCE.
- Tax relief of up to Rs.50,000 under Section 80CCD(1B), beyond the Rs.1.5 lakh
limit under ITA’s Section 80CCE.
Tax Relief on Partial Withdrawal
NPS subscribers can withdraw up to 25% of their contributions without any taxes only under certain circumstances, as laid down and approved by the Pension Fund Regulatory
and Development Authority under Section 10(12B) of the Income Tax Act of India, 1965.
Tax Relief on Annuity
Under Section 80CCD (5) of the Indian Income Tax Act, subscribers can claim tax deductions for the amount they park in their annuity plan or get as superannuation when they reach the age of 60. However, after they retire the earnings from the annuity plan would be taxed under the provisions of Section 80CCD (3).
Tax Relief on Lump Sum Withdrawal
Under Section 10, subscribers can withdraw 60% of the corpus without paying taxes on them when they reach the age of 60 or at superannuation. The remaining 40% has to be used to get an annuity to generate a flow of income in their retired life. Notably, the returns on the annuity plan attract taxation and are taxed according to the subscriber’s tax slab.
Knowing about these tax reliefs and withdrawal processes can help individuals plan their NPS investments better and allow them to manage their retirement planning with more effect. Individuals must check these points in detail before opening an NPS account for more clarity.
