Mastering NPS Withdrawal Rules🤓
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The National Pension System (NPS) is a powerful tool for building a secure retirement corpus, and understanding the rules governing NPS withdrawals is crucial for effective financial planning.
In this edition, we unravel the intricacies of NPS withdrawal rules, providing you with expert insights on partial withdrawals, premature exits, annuity options, and the tax implications of withdrawing from your NPS account.
What is the National Pension Scheme?
The National Pension Scheme (NPS) is a voluntary and long-term retirement savings scheme initiated by the Government of India. It functions on a defined contribution basis, where individuals contribute regularly to their NPS accounts throughout their professional life. These contributions are invested in a mix of equity, corporate bonds, government securities, and other market instruments, offering the potential for growth and returns over time.
NPS operates under two tiers -
Tier I is a mandatory account with restrictions on withdrawals, primarily designed for retirement savings. On the other hand, Tier II is a voluntary savings account with more flexibility for deposits and withdrawals.
Tier 1 accounts have a lock-in-period until the investor turns 60, Whereas Tier II account doesn’t have any lock in period.
NPS encourages a disciplined approach to retirement planning, and its regulated structure ensures transparency and efficiency in managing the retirement savings of millions of subscribers across the country.
NPS offers different types of exit/withdrawal options:
a. Voluntary exit, which allows subscribers to exit and withdraw before the age of 60 or superannuation.
b. Partial withdrawal, which allows the subscribers to withdraw before the age of 60 / superannuation
c. Exit upon unexpected death, which allows the nominees to exit and withdraw before normal exit / 60 years of age / superannuation.
d. Normal exit, which allows the subscribers to exit and withdraw at the age of 60 or beyond / superannuation.
NPS: Voluntary exit
If you do not wish to continue your NPS account, you can exit from NPS any time before the age of 60.
NPS Tier I
A. For Government Sector employees,
● If the accumulated corpus in the NPS account is up to Rs. 2.5 lakhs, entire amount can be withdrawn as a lump sum without any tax implications.
● If the accumulated corpus in the NPS account is more than Rs. 2.5 lakhs, you have the option to withdraw maximum 20% of the total corpus, which will be subject to income tax. The remaining 80% of the total contribution must be used to purchase annuities.
Note: Non-Government Sector employees can take a voluntary exit by following the aforementioned rules only if they have completed 5 years of subscription with the scheme.
NPS Tier II
● The NPS Tier-II account allows unconditional voluntary exit after filling the UOS – S12 form along with relevant documents. However, the withdrawal process can be cumbersome due to a limited number of Points of Presence where withdrawal requests are accepted.
NPS rules for partial withdrawal
Exciting new rules are on the horizon, paving the way for hassle-free partial withdrawal of your NPS investments.
Need some cash? Not to worry! You can now make a tax-free partial withdrawal from your NPS account. It's as simple as applying online or filling out a partial withdrawal form with your POP service provider. But, as with any great opportunity, there are a few important regulations to keep in mind. Let's explore the conditions that open the door to NPS partial withdrawals:
● NPS allows partial withdrawals only after completing 3 years of active contribution to the scheme.
● Partial withdrawals are permitted for specific purposes, such as specified medical emergencies, higher education expenses, home purchase, or marriage.
● You can withdraw a maximum of 25% of your own contributions for the aforementioned reasons.
● Frequency of Withdrawals: Partial withdrawals are allowed a maximum of 3 times during the entire tenure of the NPS account.
● After making a partial withdrawal, there is a mandatory cooling-off period of 5 years before you can make another partial withdrawal.
● Tax Implications: Partial withdrawals are exempt from tax, making them an attractive option during unforeseen financial needs.
For example, you have deposited Rs. 5 Lakhs in the NPS account in 6 years.
Now, Let’s suppose after 6 years, your total NPS corpus is Rs. 10 Lakhs including employer’s contribution. Now, if you want to withdraw, you will be allowed to withdraw a maximum amount of up to 25% of your own contribution i.e., 25% of Rs. 5 lakhs which comes out to Rs. 1.25 lakhs.
Keep in mind that each partial withdrawal reduces your overall retirement corpus, so it's essential to exercise caution when opting for this option.
NPS withdrawal rules in case of a death of subscriber
Here are the key aspects of NPS withdrawal rules in case of the unfortunate event of a subscriber's death:
A. In case of Government employees:
The nominee or legal heir is allowed to withdraw 100% of the corpus amount if the corpus is less than or equal to Rs. 5 Lakh. However, the nominees can opt for annuity if desired.
If corpus amount is more than Rs. 5 lakhs, at least 80% of the accumulated pension wealth of the Subscriber has to be utilized for purchase of Annuity by dependents and the balance 20% is paid as lump sum to the nominee/legal heir.
If none of the dependent family members (spouse, mother & father) are alive, 80% of the Corpus will be given to the surviving children of the Subscriber and in the absence of children, to the legal heirs.
B. For Non-Government Employees
The entire accumulated corpus of the individual is payable to the nominee or legal heir if the Subscriber dies before or after attaining the age of 60 years. However, the nominees can opt for annuity if they desire so.
NPS withdrawal rules after maturity (Normal Exit)
The new regulations for NPS subscription have raised the maximum age for enrollment to 70 years, up from the previous limit of 65 years. Additionally, the exit age has been extended to 75 years. Rules regarding normal exit are same for Government and Non-Government employees:
● Complete (100%) Lump sum withdrawal allowed if the corpus is less than or equal to Rs. 5 Lakh.
● After maturity, individuals have the flexibility to defer the purchase of annuity or withdrawal of any NPS amount for a maximum of three years from the age of 60 or the superannuation age, whichever comes earlier.
● If the corpus balance is more than Rs. 5 lakhs, such individuals can withdraw a maximum of 60% of the corpus, while the remaining 40% must be used to purchase an annuity plan which will provide monthly pension to the subscriber.
Understanding the NPS withdrawal process is essential, and we've provided a comprehensive overview of the latest regulations, encompassing both Tier I and Tier II accounts.
As always, at JJ Tax, we are committed to providing you with the most accurate and reliable information to make your financial decisions with confidence. Should you have any queries or need further assistance, our team of experts is just a phone call away.
Wishing you a NPS-olutely secure and pension-tastically prosperous financial future!