There are no limits on NPS Tier 2 account withdrawals since Tier 2 accounts are voluntary. In other words, subscribers can withdraw funds from a Tier 2 account as and when required to meet their needs. Tier 2 accounts function like savings accounts, allowing restriction-free withdrawals. While NPS withdrawal rules do not apply to Tier 2 accounts, you should note that voluntary Tier 2 investments are exempt from all the tax benefits under Section 80(C).
NPS withdrawal limit for Tier 1 account
As opposed to Tier 2 withdrawals, withdrawals from NPS Tier 1 accounts are subject to various rules and limits. As a subscriber, you are permitted to make partial and complete withdrawals only under certain conditions. Moreover, NPS Tier 1 withdrawals place a cap on the amount that can be withdrawn and the minimum lock-in period.
NPS withdrawal rules
1. Partial premature withdrawal
Partial NPS withdrawals are permitted for specific purposes like treatment of critical illness, children’s marriage, higher education, and construction or purchase of a home. According to the NPS withdrawal rules, up to 25% of your NPS contributions can be withdrawn after a minimum lock-in period of 3 years. Additionally, you can make a total of three partial withdrawals during the entire investment tenure, maintaining a minimum gap of 5 years between each partial withdrawal.
2. Withdrawal at retirement
Upon reaching superannuation at 60 years of age, at least 40% of the corpus should be used to buy an annuity plan to fund a regular post-retirement pension. You can withdraw the remaining 60% as a lump sum. If your NPS corpus at maturity is less than or equal to Rs. 5 lakh, you can withdraw 100% of the corpus as a lump sum.
3. Withdrawal due to premature exit
Premature exit from NPS is only permitted after 5 years. At least 80% of the NPS corpus has to be used to buy an annuity. The remaining 20% can be withdrawn as a lump sum. Both the lump-sum amount and annuity are taxable. However, if the corpus is less than or equal to Rs. 2.5 lakh, you can withdraw 100% of the corpus as a lump sum.
4. Death of the subscriber
In the case of private sector employees, 100% of the NPS corpus can be withdrawn by the legal heirs or nominees of the deceased subscriber. In the case of government employees, if the corpus is less than or equal to Rs. 5 lakh, it is paid to the nominees or legal heirs. However, if the corpus is more than Rs. 5 lakh, 80% goes to the dependent members for Default Annuity purchase and 20% as a lump sum to the nominees/legal heirs.
What is the process for withdrawal from NPS
1. NPS Tier 1 withdrawals
NPS Tier 1 accounts allow for easy online withdrawal request submissions. We have outlined the NPS online withdrawal process below:
Step 1: Visit the NSDL-CRA website
Step 2: Log in using your user ID (PRAN) and password
Step 3: Go to the ‘Transact Online’ tab and select the ‘Withdrawal’ option
Step 4: Select the ‘Partial Withdrawal from Tier 1’ option
Step 5: Enter the withdrawal reason and the specific percentage of funds you wish to withdraw
Step 6: Click on ‘Submit’
(Note: The steps outlined above pertain to partial withdrawals. Steps vary for superannuation and premature exits)
Upon successful submission, the system will generate a form. You have to submit this form along with the following documents to the nodal office:
- PRAN Card
- KYC documents
- Bank account verification documents like passbook or cancelled cheque with details like account holder’s name, account number, IFSC, etc.
- Advance stamp receipt that is cross-signed on the revenue stamp by the NPS account holder
- Request-cum-undertaking form if the request pertains to maturity withdrawals
For offline NPS withdrawals, you can download the necessary form and fill in the relevant details. The duly filled form, along with the supporting documents mentioned above, must be submitted at the nearest Point of Presence Service Provider (PoP/PoP-SP).
2. NPS Tier 2 withdrawals
To withdraw funds from an NPS Tier 2 account, you need to submit a duly filled form UOS-S12 and other supporting documents to the nodal office or PoP-SP. Once the request is registered, the amount will be dispersed in 3 days.
Also read: What NPS Tier 2
NPS Withdrawal Rules for Corporate Sector Employees on Retirement
When corporate sector employees retire, they can withdraw their National Pension System (NPS) corpus under specific rules. At retirement, individuals must use at least 40% of their accumulated NPS corpus to purchase an annuity plan, which provides a regular pension. The remaining 60% can be withdrawn as a lump sum or invested in other approved financial products. The lump sum withdrawal is tax-free up to 40% of the corpus; however, any amount exceeding this limit is subject to tax. Additionally, employees must ensure they fulfill the necessary documentation and procedures set by the Pension Fund Regulatory and Development Authority (PFRDA) to process their withdrawal smoothly. This structured withdrawal process aims to ensure that retirees receive a stable income while allowing for flexibility in managing the remaining corpus.
NPS Withdrawal Rules for Corporate Sector Employees on Early Retirement
Under the National Pension System (NPS), corporate subscribers are required to maintain their subscription for a minimum of five years. When it comes time to withdraw, they can take out the entire accumulated corpus if it is Rs. 2.5 lakh or less.
However, if the corpus exceeds Rs. 2.5 lakh, different rules come into play. In this case, at least 80% of the accumulated pension amount must be utilized to purchase an annuity. This annuity ensures that the subscriber receives a steady income post-retirement, addressing any potential financial challenges. The remaining 20% of the corpus can be withdrawn for personal or immediate financial needs, providing flexibility while securing long-term financial stability through the annuity.
NPS withdrawal rules related to the death of government employees
- Full withdrawal for corpus ≤ Rs. 5 lakh: If the deceased subscriber's NPS corpus is Rs. 5 lakh or less, the nominees or legal heirs can opt to withdraw the entire accumulated amount as a lump sum. This provides immediate financial relief without any restrictions.
- Annuity requirement for larger corpus: For a corpus exceeding Rs. 5 lakh, the dependents must utilize at least 80% of the accumulated pension wealth to purchase an annuity. The remaining 20% can be withdrawn as a lump sum by the nominee or legal heir. This ensures that a substantial portion of the funds provides ongoing financial support through an annuity.
- Distribution without dependent family members: If there are no surviving dependent family members, such as a spouse or parents, the corpus is generally allocated to the surviving children. If no children are present, the funds are distributed among other legal heirs according to applicable inheritance laws. This process ensures that the deceased subscriber’s assets are passed on according to legal guidelines.
What are the tax implications on NPS
The following tax benefits are applicable under the National Pension System Tier 1 accounts:
Section
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Exemption details
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Section 80CCD (1)
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Rs. 1.5 lakh (under the overall tax exemptions available u/s 80CCE)
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Section 80CCD (1b)
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An additional benefit of Rs. 50,000 (above the 80CCE exemption limit)
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Section 80CCD (2)
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10% of basic salary+DA contributed by the employer
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Additionally, partial withdrawals from NPS Tier 1 accounts qualify for tax deductions u/s 10 (12B). Both 60% of the lump-sum corpus and the amount used to purchase an annuity are tax-free. However, the annuity payments are taxed as per the applicable income tax slab. There are no tax benefits available under NPS Tier 2 accounts.
Also read: NPS Tier 1 vs Tier 2
Conclusion
NPS serves as an ideal tool for retirement planning, allowing you to build a sizable market-linked corpus for steady income in your golden years. Acknowledging NPS withdrawal rules and tax implications allows you to better leverage this long-term investment to meet unexpected emergency expenses and save for the future.
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