The National Pension Scheme (NPS) is a popular government-backed voluntary retirement savings scheme that helps mobilize a part of income to build corpus for pension. The scheme is open to Indian citizens, including individuals working in public, private, and unorganized sectors. However, NPS is not available to the armed forces. The savings scheme encourages individuals to park in a pension account at regular intervals throughout their working years. After retirement, NPS subscribers can opt to withdraw a portion of their saved corpus money as a lump sum and receive the remainder sum as a monthly pension.
The National Pension Scheme was initially launched for central government employees, but later it was opened up to everyone voluntarily. Individuals can port the scheme across different jobs and places and enjoy NPS tax benefits under Section 80C and Section 80CCD provisions of the Income Tax Act, 1961. To make the most of the scheme, individuals must know about these aspects, and plan their withdrawals, and file tax returns accordingly.
On that note, let’s learn more about NPS tax benefits and withdrawals in detail.
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National Pension Scheme Tax Benefits
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Employee tax deductions on self-contribution
Individuals who contribute to their NPS account are entitled to claim these tax benefits on their share of contributions –
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Tax deduction of a maximum of 10% of pay, encompassing Basic and DA under Section 80CCD(1), that is capped at Rs.1.5 lakhs under Section 80CCE of ITA.
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Tax benefits of a maximum of Rs.50,000 yearly under Section 80CCD(1B), beyond the Rs.1.5 lakh limit under Section 80CCE of ITA.
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Employee tax benefits on employer contributions
Employer’s contribution towards the National Pension Scheme of their employee is deemed eligible for NPS tax benefit of a maximum of 10% of their salary, i.e., basic and DA, or 14% of their salary if the contribution is made by the Government under the income tax provisions of Section 80CCD(2) over the Rs.1.5 lakh limit under Section 80CCE.
Tax benefits for self-employed
Self-employed individuals contributing to their NPS account are entitled to claim these tax benefits on their contributions:
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Tax deduction of a maximum of 20% of their gross income under the income tax provision of Section 80CCD(1), but up to a yearly limit of Rs.1.5 lakhs under Section 80CCE.
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Tax deduction of a maximum of Rs.50,000 under Section 80CCD(1B), over the Rs.1.5 lakh limit under Section 80CCE.
Tax Benefits on Partial Withdrawal
Individuals can withdraw a maximum of 25% of their NPS account contributions without paying any taxes, but for certain reasons and conditions, as laid down by the Pension Fund Regulatory and Development Authority (PFRDA) under the provisions of section 10(12B) of the ITA.
Tax benefit on Annuity
Under ITA’s Section 80CCD(5), NPS subscribers are allowed to claim tax benefits for the amount they put into an annuity plan or avail as superannuation when they turn 60. However, post-retirement, the income earned from their annuity plan is subject to tax under Section 80CCD(3).
Tax advantages on lump sum withdrawal
Under Section 10, NPS subscribers are allowed to withdraw 60% of their saved corpus without any taxes once they turn 60 or at superannuation. The remaining 40% has to be used to avail of an annuity plan, to generate a regular flow of income in retirement. The returns from the chosen annuity plan are subject to taxes and taxed according to their tax slab.
National Pension Scheme Withdrawal Post Retirement
Under the new National Pension Scheme guidelines, retired subscribers of the savings scheme can withdraw a maximum of 60% of their saved NPS corpus as a lump sum. The remaining 40% goes into a desired annuity plan. However, in case the chosen corpus is equal to or less than Rs.5 lakh, NPS subscribers are free to withdraw the entire corpus without availing of an annuity plan. Notably, these NPS withdrawal do not attract taxes.
For instance, NPS subscribers with a retirement corpus of Rs. 4.5 lakhs are allowed to withdraw their entire NPS fund without paying any taxes. However, if their NPS savings surpass Rs.10 lakhs, the maximum ceiling on tax-free withdrawals is set at Rs. 6 lakh. As for the remaining sum, the subscriber must buy an annuity plan, helping them generate a regular stream of pension income. Note that while the withdrawals are tax-free the annuity is taxed as per individual’s income slab. This means, that if their annuity is Rs.4 lakh the amount will be taxed as per their tax bracket and will be taxed as per the years of payout.
National Pension Scheme Early Withdrawal or Exit rules
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Upon Superannuation
At 60, National Pension Scheme subscribers are mandated to use 40% of their saved pension corpus to get an annuity, which will provide them with a regular flow of monthly income. The rest of the saved money is allowed to be withdrawn in the form of a lump sum. However, if their saved pension corpus is less than or equivalent to Rs. 5 lakhs, NPS subscribers are allowed to withdraw the entire amount at a go.
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Pre-mature exit
If a subscriber exits their National Pension Scheme account before reaching their retirement age, i.e., 60, individuals must utilize at least 80% of their savings to purchase an annuity plan. An annuity plan is essentially a type of insurance that provides individuals with a regular flow of income for life. If their pension savings is significantly less than or even equal to Rs. 2.5 lakhs, they can withdraw their pension savings as a lump sum.
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Upon the death of the subscriber
Upon the NPS subscriber’s passing, the full sum of their accumulated corpus is paid to their chosen nominee or a legal heir.
Before subscribing to the National Pension Scheme, individuals should find out about the tax benefits and limitations on withdrawals in detail. Having a clear insight into the plan and its offering will help individuals plan their investments and shape their retirement planning accordingly.