Government employees contribute 14 per cent of their basic monthly salary and dearness allowance to the Tier 1 account of the National Pension System (NPS). In comparison, their counterparts in the private sector can contribute 10-25 per cent of their monthly wages. The government has recently revised the withdrawal norms to allow subscribers to withdraw the funds systematically every month to ensure regular cash flow and optimise returns by enabling the corpus to stay longer and accrue more interest. Conversely, the Tier 2 account of the NPS is for general investments for wealth growth and is available only to those with Tier 1 accounts.

Under the NPS framework, subscribers can withdraw up to 60 per cent of their accumulated funds at retirement or after reaching 60, and they will need to reinvest the remaining amount in an annuity plan for pensions. The National Pension System Trust, established by the Pension Fund Regulatory Development Authority (PFRDA) in 1882, regulates the assets under NPS.

Let’s explore the benefits of an NPS account:

Tax Benefits

NPS allows deductions up to Rs. 1.5 lakh from taxable income in a financial year under section 80CCD (1) of the Income-tax Act, 1961. It also allows an additional deduction of Rs. 50,000 under section 80CCD (2), bringing the total tax exemption to Rs 2 lakh in a financial year.

Also Read: NPS Deduction: Know The Tax Benefits Of Partial And Lump Sum Withdrawals

To make contributions and claim tax deductions in a Tier 1 account, the subscriber can visit the NPS website or point-of-presence (POP). The tax benefits in NPS allow subscribers to save more for retirement while safeguarding their investments from short-term market volatility.

Withdrawals

PFRDA’s master circular on January 12, 2024, specifies that subscribers can now partially withdraw up to 25 per cent from the corpus three years after account opening. However, the employer’s contribution and the interest amount cannot be accessed for partial withdrawals.

Systematic Lumpsum Withdrawals

PFRDA has recently allowed Systematic Lumpsum Withdrawals (SLW) from the accumulated corpus at retirement. For instance, although the withdrawal limit of 60 per cent at retirement remains the same, the subscribers can withdraw it in SLW instead of a lump sum in one go.

Also Read: Till What Age Can Senior Citizens Avail Of SLW Facility In NPS?

The remaining 40 per cent will need to be reinvested in an annuity plan for monthly pensions through fund managers. The withdrawals in the systematic lumpsum mode can be made weekly, monthly, quarterly, semi-yearly or yearly. One can continue withdrawals via SLW up to 75, and after that, the corpus will be returned to the subscriber or the nominee.