10 Jun NPS withdrawal rule set to change Soon- All you need to know about NPS

National Pension System (NPS) and its tax benefits: All you need to know

Financial planning is a crucial step in achieving our life goals. It helps us manage our money, expenses, and investments, allowing us to build the life we want. By taking into account unexpected expenses, emergencies, and economic changes, a good financial plan ensures a worry-free future. Surprisingly, making small changes in how we handle our money is the key to creating a successful plan.To learn more about financial planning and Stock market basics one can consider enrolling in our Learning Courses, here.

One important aspect of financial planning is tax planning.

It means understanding how to manage our taxes by taking advantage of available deductions and exemptions. By doing this, we not only fulfill our responsibilities as citizens but also reduce the amount of tax we have to pay.

Unfortunately, many people forget about tax planning until the last minute and end up buying tax-saving products that don’t really fit their needs.

For example, someone might invest in a 5-year tax-saving bank fixed deposit without considering if it aligns with their financial plan. That’s why it’s crucial to plan our taxes wisely and make it an integral part of our financial planning process.

Also Read:What Should Existing Home Loan Borrowers Do after current Interest rate Pause?

National Pension System (NPS): A Tax-Saving Investment Option

Overview of NPS

The National Pension System (NPS) is an investment cum pension plan launched by the Indian Government. It offers tax-saving benefits and is available to Indian citizens aged 18 to 70, including employees from the public, private, and unorganized sectors (excluding Armed Forces personnel).

NPS primarily aims to provide retirement security through attractive investment options during the working years and flexible pension solutions in retirement.

Investing in NPS

NPS offers low-cost pension plans with investment options in

-Equity,
-Government
-Debt,
-Alternate investment funds, and
-Corporate debt.

The allocation to equity is capped at 75% until the age of 50, gradually reducing thereafter while debt allocation increases.

Deposits and withdrawals in NPS can be made through two types of accounts:

-NPS Tier 1 and Tier 2.

Each account offers different benefits, allowing taxpayers to choose the most suitable one.

NPS Tier 1 Account

NPS Tier 1 is specifically designed for retirement security and offers tax benefits. Contributions made to this account cannot be withdrawn until retirement or the age of 60, except in exceptional circumstances such as death or medical emergencies.

-Minimum contribution of Rs. 1,000 is required to open the account

-Minimum contribution: Rs. 500 (one-time) and Rs. 1,000 (annually) for Tier 1 accounts, Rs. 250 (annually) for Tier 2 accounts.

-Withdrawals allowed after retirement or age 60, with exceptions

-Up to 60% of the accumulated amount can be withdrawn tax-free

-Remaining 40% is used to purchase annuities for regular pension income

Tax Benefits of NPS Tier 1 Account

Having an NPS Tier 1 account provides an Exempt-Exempt-Exempt (EEE) status for tax purposes.

-Individuals who hold an NPS Tier 1 account can claim tax benefits under Section 80 CCD(1) within the overall ceiling of Rs. 1.5 lakh under Section 80 CCE.

-Additionally, the NPS Tier 1 account qualifies for an additional tax deduction of Rs. 50,000 under Section 80 CCD(1B), which is in addition to the Rs. 1.5 lakh ceiling prescribed under Section 80 CCE.

-Furthermore, for subscribers under the NPS Corporate Model, employer contributions up to 10% of the employee’s basic salary plus dearness allowance (DA) per year are also tax-deductible under Section 80 CCD(2).

NPS Tier 2 Account

NPS Tier 2 is voluntary savings account with no lock-in period. It functions similarly to an open mutual fund, allowing easy liquidity with withdrawals generally taking up to three days.

Individuals can withdraw the entire corpus as a lump sum or make multiple withdrawals without limitations.

Tax benefits are not available for NPS Tier 2 investors, except for government employees who can claim deductions under Section 80 C.

However, this benefit comes with a lock-in period of three years. There are no minimum balance or annual contribution requirements, but the minimum contribution amount at any point is Rs. 250.

Eligibility for NPS:

All Indian citizens (including NRIs) between the ages of 18 and 70 can participate in NPS.

• Corporate Model: Employer/employee in the organized sector contributes to the employee’s Tier 1 account.
• Central/State Government Model: Mandatory participation for government employees who joined on or after January 1, 2004.

Why invest in NPS:

-The first step towards financial planning is suitable for individuals of all ages.

-Lowered age barrier, allowing anyone 18+ years to open an NPS account.

-Provides a Permanent Retirement Account Number (PRAN) for easy portability.

-Helps gain an understanding of equity and debt asset classes in a tax-efficient, cost-efficient, and performance-efficient manner.

-Very less Minimum contribution is required: Rs. 1,000 (annually) for Tier 1 accounts, Rs. 250 (annually) for Tier 2 accounts.

-Contributions can be made up to 70 years of age.

-A portion of NPS invested in equities for potentially higher returns compared to traditional tax-saving investments like PPF.

-Hassle-free account opening process online and offline.

NPS Withdrawal

NPS Withdrawal Flexibility: Systematic Lumpsum Withdrawal (SLW) Option

PFRDA, the regulatory authority for NPS, is planning to introduce the Systematic Lumpsum Withdrawal (SLW) option by the end of this quarter. This new feature will provide NPS subscribers with flexibility in withdrawing their retirement corpus.

Current Rule:

Currently, when an NPS subscriber turns 60, they can withdraw up to 60% of the retirement corpus as a lump sum. The remaining 40% is used to purchase an annuity, providing a regular pension income.

Subscribers also have the option to defer the lump sum withdrawal until the age of 75. In this case, they can opt for a phased withdrawal, submitting a withdrawal request annually.

Clarifying Withdrawal and Exit:

-NPS account holders cannot withdraw the entire corpus after retirement.
-At least 40% of the corpus must be set aside for receiving a regular pension from a registered annuity service provider.
-The remaining 60% is completely tax-free.
-Regular investments must be made until age 60 (extendable to age 70), with partial withdrawal of up to 25% allowed after three years (applicable for Tier 1 accounts).

Proposed Changes in NPS Withdrawal:

Under the new SLW option, NPS subscribers will have the choice to retain their 60% corpus with NPS and withdraw it in a staggered manner.

Withdrawals can be made periodically, such as monthly, quarterly, half-yearly, or annually, until the age of 75.

The remaining NPS corpus will continue to be invested and earn returns until the entire corpus is withdrawn.

Flexibility for Tier-I and Tier-II Accounts:

The SLW option will be available for both Tier-I and Tier-II accounts. Even for Tier-II accounts, subscribers can initiate the Systematic Lumpsum Withdrawal before reaching the age of 60.

This upcoming facility aims to provide NPS subscribers with more flexibility and control over their retirement savings, allowing them to choose between lump sum withdrawal and systematic withdrawal over a period of 15 years until the age of 75.

NPS Systematic Lumpsum Withdrawal Option: How it Works

Activation of Systematic Lumpsum Withdrawal Option:

As per the draft proposal released by PFRDA on September 29, 2022, to avail of the Systematic Lumpsum Withdrawal (SLW) option, NPS investors need to initiate a one-time request through online or offline channels.

This request activates the periodic payout feature.

Specify Request Details:

During the activation request, NPS investors need to provide specific details such as the desired withdrawal amount, start date, end date, and other relevant information.

These details determine the frequency and duration of the periodic withdrawals.

Restrictions on Contributions and Partial Withdrawals:

Once the SLW option is activated, NPS subscribers are not allowed to make further contributions to their tier-I account. Additionally, partial withdrawals are not permitted after initiating the Systematic Lumpsum Withdrawal option.

Withdrawal Interval and Remaining Investment:

At the time of requesting SLW, subscribers must indicate the number of units or the amount they want to receive at each interval.

The remaining balance after each payout remains invested in the NPS account, allowing subscribers to continue participating in market-linked investments and benefit from potential growth.

Multiple Exit Options:

Upon exiting the NPS, subscribers have several choices available to them.

These options include
-One-time lump sum withdrawal,
-Systematic Lumpsum Withdrawal,
-Deferment, and
-Continuation.

Automation and Benefits:

Choosing the Systematic Lumpsum Withdrawal option at periodic intervals through automation adds flexibility to the withdrawal process. It also provides liquidity, allowing subscribers to access their retirement corpus gradually. This approach helps optimize retirement benefits and allows the remaining invested amount to potentially earn market-linked returns within the NPS account.

The choice between SLW and Annuity Purchase:

NPS subscribers will have the option to choose between the Systematic Lumpsum Withdrawal (SLW) and the annuity purchase rule for their retirement corpus.

They can allocate 60% of the corpus for periodic lump sum withdrawals and use the remaining 40% to purchase an annuity.

The PFRDA chairman has confirmed that the annuity purchase rule will remain unchanged.

This provides flexibility to NPS subscribers, allowing them to receive periodic payouts while also securing a regular income through the annuity.

Note: The information provided is based on the draft proposal released by PFRDA and is subject to final implementation. Subscribers should consider their retirement needs and consult with financial advisors to determine the most suitable withdrawal options within the NPS framework.

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