National Pension System: What is the withdrawal process and NPS tax benefits?

Surbhi_Pal · October 3, 2023, 6:35am

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Since NPS is a retirement benefit, funds can be withdrawn only after the age of 60 years.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:

WileECoyote · October 4, 2023, 10:59am

in some cases, withdrawal of funds is also allowed before the age of 60.

What are some/any rules/conditions applicable here?

Surbhi_Pal · October 5, 2023, 5:58am

Hey @WileECoyote,

Below are the conditions if you wish to withdraw funds before the age of 60.

Early withdrawals, up to 25% of your corpus, can be made for specific reasons, including:
- Education Expenses
- Child’s wedding
- Home purchase or construction
- Medical emergencies
A maximum of 3 early withdrawals are permitted, with a mandatory 5-year gap between each.

Hope this clarifies!

WileECoyote · October 6, 2023, 9:58am

If the withdrawal is done( maximum of 3 early withdrawals) - what are the tax implications for this?

Surbhi_Pal · October 6, 2023, 11:09am

Hey @WileECoyote,

There will be no tax liability on the amount withdrawn.

Swaraj_Mangaonkar · October 17, 2022, 9:43am

I always wondered if there’s a way to increase this limit of deductions greater than 1.5L u/s 80C … Is it possible? If so then how can one do it?

Muskan_Balar · October 17, 2022, 12:08pm

Hi @Swaraj_Mangaonkar

There are certain deductions that you can claim by Investing in NPS (National Pension System)

The contribution to NPS is deductible up to Rs 1,50,000 under section 80CCD(1).
Over and above you can further claim the additional benefit of Rs 50,000 under section 80CCD(1B).

So, overall you can reduce your taxable income by Rs 2,00,000.
And one can report deductions under section 80C while filing an ITR.

Hope it helps.

Jigar_Marvaniya · October 17, 2022, 1:57pm

May I know how does NPS works? And its investment process?

Muskan_Balar · October 18, 2022, 12:22pm

Hello @Jigar_Marvaniya

The primary goal of NPS is to provide pension after retirement (saving plan).

An individual holding an NPS account have to make a minimum contribution of Rs. 1000 P.A in tier 1 account.
It matures when you turn 60.
You can withdraw up to 60% of the amount (corpus) tax-free, when you are invested till retirement.
The remaining money, ideally 40% of the total invested amount, should be used to buy an annuity plan, to get a lifelong pension.

NPS accounts are of two types, tier I account and tier II account.
The tax benefits are only applicable to tier-I accounts.

There are multiple PFMs, Investment options (Auto or Active), and four Asset Classes i.e. Equity, Corporate debt, Government Bonds, and Alternative Investment Funds.

Here is an article to know more about it and the process details.

Hope we have addressed your query.

paliya_hitesh · October 20, 2022, 11:52am

As it is known, the maximum amount of deduction that can be claimed under section 80C is 1,50,000, then if I invest in NPS say, 1.5L & in ELSS 2L, what would be the deduction amount that can be availed?

akash_jhaveri · October 20, 2022, 1:56pm

@Muskan_Balar Can I invest only in Tier 2 NPS and not Tier 1 ? May I know the comparison between Tier 1 and Tier 2 account?

Muskan_Balar · October 31, 2022, 12:56pm

Hi @akash_jhaveri

You can open the NPS Tier II account only when you already have a Tier I account.

Tier 1 account is mandatory to open, while tier 2 is voluntary and can only open by members of tier 1.
In tier 1, withdrawal is restricted, whereas in tier 2 subscribers are free to withdraw at any time.
Only tier 1 account members are eligible for tax benefits.
Minimum contribution for account opening in tier 1 is Rs. 500 and in tier 2 is Rs. 1000.
Minimum NPS contribution in a financial year Rs. 500 towards tier 1 account and Rs. 250 towards tier 2 account.
Taxation on withdrawal for tier 1 - entire corpus is tax-exempt, at maturity. For tier 2 - One may withdraw the entire corpus, which is added to income and taxed according to the tax bracket they are in.

Hope this helps.

Sanjay_S · March 31, 2023, 7:18pm

@Muskan_Balar I need to do tax planning with support for 2023-2024, I have a small investment in stocks. Any guidance you may extend. Not sure if we have platform to connect 1-1. Regards

Shrutika_Shah · April 3, 2023, 5:01am

Hi @Sanjay_S

Thanks for connecting on Quicko Tax QnA. Your queries seem to be more related to personalized tax planning.
You can book a MEET where a dedicated tax expert can connect with you over a video call, understand your queries, and suggest you the best possible solutions.

nazmul · December 23, 2023, 9:34am

Main el self employed hoon,business karta hoon. Main 80c na pura amount 150000/- invest karta hoon insurance and ppf milake. Kya main NPS main invest kar sakta hoon additional tax benefit ke liye? Pls thoda section ke saath bataye ma’am.

CA_Niyati_Mistry · December 26, 2023, 6:52am

Hello @nazmul,

You can save ₹50,000 under section 80CCD(1b) over and above section 80C by investing in NPS.