We have already briefed about the NPS(National Pension Scheme) and its types in a previous thread that you can read here!
Now, we’re diving into the practical aspects: how to withdraw your NPS funds and the tax implications and benefits.
What are the rules for NPS withdrawals?
As NPS is a retirement benefit, funds can be withdrawn after the age of 60 years.
- At age 60, you can withdraw up to 60% of your accumulated corpus, and this part is tax-free.
- You must retain a minimum of 40% of your investment to receive a pension, which will be taxable as “income from other sources”.
However, in some cases, withdrawal of funds is also allowed before the age of 60.
- If you’ve diligently invested for at least 3 years, you can consider early withdrawals.
- Early withdrawals(partial Withdrawal), 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.
The early withdrawal process only applies to Tier I account as Tier II account allows the withdrawal of the entire investment without any conditions and the same are taxed as capital gains.
What sweetens the deal with NPS? Tax benefits, of course.
If you’re a salaried individual, you can claim the following deductions, if you invest in NPS
| Category | Section | Tax Benefits |
|---|---|---|
| Own Contribution | Section 80CCD(1) | 10% of Salary up to INR 1.5 lakh |
| Employer Contribution | Section 80CCD (2) | 10% of the salary (other employees) |
| 14% of the salary (central govt. employees) | ||
| Additional Contribution | Section 80CCD(1B) | Additional deduction of up to INR 50,000. |
Don’t worry, even if you are a self-employed individual, you are still eligible for the above deductions except for deduction u/s 80CCD (2).
A key consideration: The tax benefits are available only in the case of the Tier I account and not in the Tier II account.
Still have doubts? Ask em away!