Process, Rules & Tax Benefits of NPS Maturity

Process, Rules & Tax Benefits of NPS Maturity

Retirement planning is a key element throughout your financial cycle. Moreover, when planning for your retirement, there are so many investment instruments for you to choose from. In that long list comes the NPS or National Pension Scheme. It is a retirement benefit scheme established by the Indian Government. This scheme was introduced so you could say bye to the tension and enjoy your pension.

Keep reading this post to understand everything that revolves around NPS.

What is the National Pension Scheme?

NPS (NPS full form – National Pension Scheme) is a social security scheme launched by the Central Government. Except for members of the military services, employees from the public, private, and unorganised sectors are eligible for this pension system.

The system encourages employees to make monthly contributions to their pension accounts while working. After retirement, the subscribers can withdraw a portion of the corpus. When you are an NPS account holder, you will get the balance as a monthly pension once you retire.

Previously, the NPS plan exclusively covered Central Government workers. Employees who join the Central Government on or after 1 January 2004 are required to participate in the National Pension System. The PFRDA has now made it optional for all Indian nationals.

Types of NPS Accounts

There are two NPS accounts, Tier I and Tier II. Tier I accounts are meant for retirement savings, whereas Tier II accounts can be used to save for emergencies. Operating parameters for Tier I and Tier II accounts are as follows:

Tier I NPS Account: If you want to join NPS, you must first establish a Tier I NPS account.

Withdrawals from this account are restricted and conditional. You can start a Tier I NPS account with a minimum contribution of Rs. 500/-. To keep the Tier I National Pension Scheme Account active, you need to deposit the minimum amount of Rs. 1,000 annually.

Tier II NPS Account: Tier II NPS accounts are optional and can be formed at the same time as Tier I NPS accounts or later. You can withdraw funds from this account at any time.

Tier II NPS Accounts can be started with an initial deposit of Rs.1000/-. There is no obligation to deposit a certain amount yearly to keep the Tier II NPS Account operational.

What is the Maturity of the NPS Account?

The National Pension Scheme (NPS) matures when the subscriber reaches the age of sixty. This implies that you may only withdraw your corpus after you reach the age of 60.

How do you make premature withdrawals with an NPS account?

If an investor wishes to terminate NPS investment and withdraw NPS funds before reaching the age of 60, the PFRDA allows this, subject to certain conditions.

Tier I

Investors can elect for a premature departure, which means they can cease contributing to their NPS Tier I accounts before retiring. However, this option is only available after a ten-year commitment. The regulations for premature withdrawals from Tier I accounts are as follows:

≤ Rs. 1,00,000 – lump sum without tax.

> Rs. 1,00,000 – Up to 20% of the corpus, and it is subject to income tax. 80% needs to be invested in annuities.

Tier II

The NPS premature exit criteria for Tier 2 accounts are straightforward. The full money can be withdrawn anytime, according to the investor’s requirements. As a result, it functions similarly to a traditional savings account. However, the procedure for NPS premature leave might be lengthy. The NPS withdrawal rules for 2021 have remained unchanged thus far.

Note: When it is a withdrawal from Tier 1 NPS accounts, you need to consider some time periods and keep them in mind. 

Based on the type of withdrawal you are making, there are different forms available:

  • Partial withdrawal
  • Death
  • Superannuation withdrawal
  • Premature withdrawal

What are the tax benefits of an NPS Account?

On Self-Contribution: Employees who contribute to the NPS can receive the following tax benefits for their contributions:

  • Section 80CCD(1) allows for a tax deduction of up to 10% of salary (basic plus DA), with a limit of Rs.1.5 lakh under Section 80CCE.
  • Section 80CCD(1B) allows a tax deduction of up to Rs.50,000, in addition to the overall maximum of Rs.1.5 lakh under Section 80CCE.

On Employer Contribution: The employer’s contribution to an employee’s NPS is eligible for a tax deduction of up to 10% of pay, i.e., basic + DA, or 14% of salary if contributed by the Central Government under Section 80CCD(2) in excess of the Rs.1.5 lakh maximum granted by Section 80CCE.

For self-employed: Self-employed persons who contribute to the NPS can claim the following tax benefits for their own contributions:

  • Section 80CCD(1) allows a tax deduction of up to 20% of gross income, with a total maximum of Rs.1.5 lakh under Section 80CCE.
  • Section 80CCD(1B) lets a tax deduction of up to Rs.50,000, in addition to the overall maximum of Rs.1.5 lakh under Section 80CCE.

On Partial Withdrawal: Partial withdrawals from NPS are eligible for tax exemption if the amount removed is up to 25% of the self-contribution, subject to the circumstances and requirements specified by PFRDA in section 10(12B).

On Lump Sum Withdrawal: Section 10 exemption from taxation a lump sum withdrawal of 60% of cumulative NPS funds at the age of 60 or when superannuation begins.

If you are thinking about the withdrawal for your NPS account, you can find the withdrawal form on the CRA-NSDL website under the section ‘Form.’ Apart from that, now that you know everything revolving around the withdrawal of your funds from an NPS account, you can move ahead with this procedure.

Conclusion

An NPS account is everyone’s go-to product for retirement planning, but if you are making a premature withdrawal of any kind, make sure it is worth it!