National Pension System: From Tax Benefits, Schemes To Withdrawal. Know Everything About The Pension Scheme

If you are considering an avenue to invest for retirement planning, then you can consider National Pension System (NPS) as it offers a range of investment options and a choice of pension fund schemes. In its recent tweet, the country’s largest lender State Bank of India (SBI) has encouraged customers to take advantage of tax-saving opportunities by contributing towards NPS. “Begin saving for your future with the National Pension System," SBI said.

Begin saving for your future with the National Pension System.

Know more: https://t.co/BnflxsoGcn #SBI #NPS #NPSZaruriHai #RetirementPlanning #RetirementSavings #AmritMahotsav @nps_trust @PFRDAOfficial pic.twitter.com/8CuEH5cPI9

— State Bank of India (@TheOfficialSBI) March 19, 2023

Here's what you should know about the government-promoted scheme.

What is NPS?

An individual both resident and non-resident between the ages of 18 and 70 can set aside an amount on a regular basis in the scheme. At the time of retirement, he or she has the option of withdrawing up to 60 per cent funds as lump sum while the rest can be used as an annuity plan for a regular flow of income.

NPS is considered the world’s lowest-cost pension scheme.  There are two types of accounts in NPS. The Tier I account is mandatory and comes with a host of tax benefits, but you cannot withdraw your contributions till you reach the age of 60. The Tier II account has no restrictions, and you can withdraw money anytime you want. 

The money deposited in the NPS Tier-II account can be withdrawn at any time, whereas the money deposited in the Tier-I account generally cannot be withdrawn before the completion of 60 years of age.  

An individual can invest in a mix of equity, government debt, alternate investment funds, and corporate debt, with allocation to equity capped at 75 per cent till the age of 50 after which, it reduces steadily while allocation to debt increases.

NPS Tier-1 account

Tier I – Pension account (Mandatory A/C - Tax benefit available)

Minimum Contribution during A/C opening is Rs.500 for Tier I

NPS Tier-2 account

Tier II – Investment account (Optional A/C – No tax benefit but corpus is withdrawable anytime)

The minimum Contribution during A/C opening is Rs.1,000 for Tier II

Flexibility of Investments

The scheme offers flexibility in terms of investments.  A subscriber may select a Pension Fund Manager (PFM) of their choice. You can also change PFM once during a Financial Year. The asset allocation can also be chosen and changed four times in a given Financial Year.

Check Tax Benefits available under Tier I Account

Employee Contribution:

Exclusive tax savings provision: Tax deduction u/s 80CCD (1B) on contribution of Rs.50,000.

Tax deduction u/s 80CCE for investments (10% of Basic & DA) within overall limit of Rs. 1.50 lacs.

Employer contribution

Tax deduction up to 10 per cent of salary (Basic + DA) u/s 80CCD (2) subject to monetary ceiling of Rs.7.5 lacs (includes PF, Superannuation, etc.)

Check Exit Option under Tier I

On attaining the age of 60 years:

A subscriber has to invest a minimum 40 per cent of the corpus in Annuity Scheme. 

Around 60 per cent of the corpus can be commuted/withdrawn in lump sum/ staggered anytime up to age of 75 yrs; Amount is tax free.

If a total corpus is equal or less than Rs. 5.00 Lacs, then entire corpus can be withdrawn

Before 60 years of age (after completion of 5 years):

20 per cent of the corpus can be withdrawn in lump sum

80 per cent of the corpus will be invested in a ‘Annuity Scheme’

If total corpus is equal or less than Rs. 2.50 Lacs, then entire corpus can be withdrawn

NPS: Part Withdrawals under Tier I

A partial withdrawal of accumulated pension wealth, not exceeding 25% of the employee contributions, after a lock in period of 3 years.

Allowed to withdraw only a maximum of three (3) times during the entire tenure subject to conditions prescribed by the Regulator.