NPS Premature Withdrawal

NPS Withdrawal Overview

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NPS Premature Withdrawal Rules

You can take money out of your NPS account before retirement, but only after it has been active for at least 3 years. It is called a premature withdrawal. If you decide to exit the scheme early:

This ensures continued pension income post-retirement.

NPS Partial Withdrawal Rules

NPS withdrawal rules support financial emergencies while encouraging long-term savings. Let’s look at the key rules for partial withdrawals from NPS.

NPS Withdrawal Process

You can withdraw funds from the National Pension Scheme(NPS) online or offline.

1. Online Process

   To withdraw your funds online:

   • Visit the official NPS portal. 
   • Use your PRAN (Permanent Retirement Account Number) and password to log into your account.
   • Choose the type of withdrawal you want. This could be a partial withdrawal, premature exit, or withdrawal after retirement.
   • Follow the instructions on the screen.
   • Upload documents like ID proof, bank details, and annuity information.

2. Offline Process

   For offline withdrawal, download the appropriate form from the NPS website or collect it from your Point of Presence (POP). The available forms include:

   • Partial withdrawal form
   • Premature exit form
   • Exit due to retirement or disability
   • Exit on the death of a government employee

   Once you have the right form:

   • Fill in the details carefully, including your full name, date of birth, PRAN, PAN, address, gender, and nominee details.
   • Attach all required documents, such as:
     • PRAN card copy
     • PAN card copy
     • Cancelled cheque or the first page of your bank passbook
     • Identity and address proof
   • Submit the filled form and documents to your nearest POP (Point of Presence).

   Your money is paid through the banking system, so you’ll need to provide:

   • Your bank’s name and branch
   • IFSC and MICR codes
   • Branch address

   Suppose you’re exiting from a Tier-I account. In that case, you’ll also need to provide details about how the remaining corpus will be used, especially if you’re buying an annuity plan for monthly pension payments. Make sure to choose an annuity provider approved by PFRDA (Pension Fund Regulatory and Development Authority).

Tax Benefits of NPS

The Income Tax Act provides three types of deductions for contributions to the National Pension Scheme (NPS). These are covered under Sections 80CCD(1), 80CCD(1B), and 80CCD(2).

1. Section 80CCD(1): Employee’s Own Contribution

   This section covers contributions made by salaried and self-employed individuals to their own NPS Tier I accounts.

   • Salaried individuals can claim a deduction of up to 10% of their salary (Basic + DA).
   • Self-employed individuals can claim up to 20% of their gross annual income.
     This deduction is included within the overall cap of ₹1.5 lakh under Section 80CCD(1). If you're already utilising this limit through other investments like PPF, LIC, or ELSS, your NPS contribution must be adjusted accordingly.

   Example:

   • Madhav’s Basic Salary + DA is ₹6,60,000 per year
   • 10% of ₹6,60,000 is ₹66,000
   • This ₹66,000 is deductible under Section 80CCD(1)
   • But this is part of the ₹1.5 lakh limit, which also includes investments like PPF, LIC, and ELSS
   • Tip: If Madhav has already used the full ₹1.5 lakh limit through other options, he needs to adjust those to claim this deduction

2. Section 80CCD(1B): Additional Deduction for NPS

   This section allows all NPS subscribers to claim an additional deduction of up to ₹50,000 for voluntary contributions made to Tier I accounts.

   This benefit is over and above the ₹1.5 lakh limit under Section 80C and can be availed irrespective of your claims under Section 80CCD(1).

   For instance, if you've already exhausted the ₹1.5 lakh limit via other eligible investments, contributing an extra ₹50,000 to NPS can still help you save more tax under this provision.

   Example:

   • Madhav has already claimed ₹1.5 lakh in deductions from PPF and LIC
   • He contributes an extra ₹50,000 to NPS
   • This ₹50,000 can be claimed as an extra deduction under Section 80CCD(1B), separate from the ₹1.5 lakh limit
   • This allows Madhav to increase his total tax-saving limit from ₹1.5 lakh to ₹2 lakh

3. Section 80CCD(2): Employer’s Contribution

   Applicable only to salaried individuals, this section covers contributions made by the employer to the employee’s NPS Tier I account.

   • Under the old tax regime, the deduction is allowed up to 10% of salary (Basic + DA).
   • Under the new tax regime, the limit increases to 14% for government employees.
     This benefit is separate and in addition to the deductions under Sections 80CCD(1) and 80CCD(1B), making it an excellent tax-saving avenue for employees with NPS-inclusive salary packages.

   Example:

   • Madhav’s Basic + DA is ₹9,40,000 annually
   • His employer contributes ₹94,000 (10%) to his NPS account
   • The full ₹94,000 is deductible under Section 80CCD(2)
   • This deduction is claimed separately and doesn’t reduce Madhav’s own ₹2 lakh limit from Sections 80CCD(1) and 80CCD(1B)

Summary

The National Pension Scheme (NPS) helps individuals save systematically for retirement. Premature withdrawals are permitted for specific needs while ensuring core savings remain for retirement security. It ensures that most funds remain invested to provide a steady income after retirement. By setting clear withdrawal rules, NPS maintains a balance between access to funds when needed and securing financial stability in the long term.