We have already briefed about the NPS (National Pension Scheme) and its types in a recent thread that you can read here!
Now, we’re diving into the practical aspects of it:
- how to withdraw your NPS funds
- tax implications of NPS withdrawal
- NPS tax benefits.
What are the rules for NPS withdrawals?
Since NPS is a retirement benefit, funds can be withdrawn only after the age of 60 years.
- At age 60, you can withdraw up to 60% of your accumulated corpus as lumpsum, and this part is completely tax-free.
- You must retain a minimum of 40% of your investment to receive a pension (buying an annuity plan), which will be taxable as per your applicable slab rate.
However, in some cases, withdrawal of funds is also allowed before the age of 60 like:
- If you’ve diligently invested for at least 3 years, you can consider early withdrawals.
- Early/partial withdrawals up to 25% of your corpus can be made for specific reasons, including:
- Education expenses
- Child’s wedding
- Home purchase/construction
- Medical emergencies
- A maximum of 3 early withdrawals are permitted, with a mandatory 5-year gap between each.
The early withdrawal process only applies to Tier I account. People investing in NPS Tier II accounts are allowed to withdraw the entire investment without any conditions and the same are taxed as capital gains.
You can also exit the NPS scheme before maturity. In this case,
- You can withdraw 20% of the corpus as lumpsum and the remaining 80% should be used to purchase an annuity.
- If your total corpus is less than ₹2.5L, you can withdraw the entire amount.
Tax benefits of NPS
NPS allows tax benefits to both self-employed and salaried individuals. Below are the deductions you can claim if you invest in NPS.
Even if you are a self-employed individual, you are still eligible for the above deductions except for deduction u/s 80CCD (2).
The tax benefits are available only in the case of the Tier I account and not in the Tier II account.
We’ve covered everything about NPS in this video, you can check it out to learn more: