National Pension Scheme: Its features, tax benefits, and withdrawal process explained!

One of the social security schemes that you can open offline and online as well is the National Pension Scheme. It falls under the jurisdiction of Pension Fund Regulatory and Development Authority (PFRDA). The NPS scheme was designed to encourage savings among employees of both central and state and common citizens. Launched on January 1, 2004, the purpose of the scheme is to reform pensions in India.

It is the cheapest retirement plan available in India currently. PFRDA later appointed National Securities Depository Limited (NSDL) as the Central Record Keeping Agency (CRA). Some of the functions that CRA handles are customer service, administration, and record of all the subscribers. Every NPS member receives a Permanent Retirement Account Number (PRAN) from CRA. So, any transaction related to PRAN is also managed by CRA.

Features:

NPS account holders can enjoy the following features –

• Eligibility: Indian residents should be between 18 to 65 years for applying for NPS. Those who do not come under any NPS sector are also eligible for the scheme.
• Registration costs: The initial costs as part of registration is INR 500 (exclusive of taxes).
• Contribution: The contribution is INR 500, and there is no maximum limit. You can make maximum INR 1,000 contribution towards the Tier-1 account.
• Number of contributions: Subscribers must make at least one contribution in a financial year.
• Payment mode: You can make it either through cheque, demand draft, or cash.
• Change of scheme and fund manager: If you are unhappy with the overall scheme, you can change the fund manager of the scheme. Both Tier-I and Tier-II accounts have these options at their perusal.

Tax benefits:

• Under Section 80C, the subscribers are eligible for tax exemptions of up to INR 1.5 lakh.
• Section 80CCD (1) covers the subscribers’ contributions. It is a portion of Section 80C, and the maximum deduction they can claim is 10 per cent of the employee’s salary. For independent professionals, the maximum tax deductions are up to 20 per cent of the income.
• Employer’s contribution towards NPS gets covered under Section 80CCD (2), and it is not part of Section 80C. Also, self-employed individuals cannot avail any benefits under this section. The deduction is up to 10 per cent of the regular income and allowance, or gross salary, or actual contribution, whichever is lower.
• Additionally, you can claim INR 50,000 exemption on any self-contribution towards the scheme.

Withdrawal process:

• Exit rule and early withdrawal: It is essential consumers make contributions towards the scheme until they 60 years as NPS account is meant for pension. However, under specific grounds, you can make 25 per cent withdrawal of the investment amount, if they have successfully run the account for three years. The cases valid for early withdrawal are –
• If the subscriber’s child is getting married
• Higher studies
• Buying or building a home
• Medical treatment

NPS withdrawal is possible up to three times, and there must be gap of five years between withdrawals. The early withdrawal is applicable only for Tier-I. Under Tier-II you can withdraw the entire amount.

Withdrawal after 60 years: You can withdraw the entire investment once you reach the age of 60. The subscribers should retain at least 40 per cent of investment for receiving a pension. You get the pension from insurance registered under PFRDA. You can withdraw the remaining 60 per cent and are tax-free.