India’s New Rules for Withdrawing Pension from the National Pension System

Posted by Written by Naina Bhardwaj Reading Time: 6 minutes

We introduce India’s National Pension System (NPS), which also covers private sector subscribers. Payments to the NPS may have tax benefits.

The Pension Fund Regulatory and Development Authority (PFRDA) recently issued a circular mandating all National Pension System (NPS) subscribers to upload specific documents from April 1, 2023. The PFRDA has stated that uploading these documents will ensure timely payments of annuity income.

What documents must be uploaded for quick distribution of annuity income?

To facilitate the speedy distribution of annuity income, the PFRDA has mandated the uploading of following specific withdrawal and KYC documents for simultaneous processing of exit and annuity:

  • NPS withdrawal/exit form
  • Identity and address proof, as mentioned in the withdrawal form
  • Proof of your bank account
  • Permanent Retirement Account Number (PRAN) card copy. You can apply for a PRAN card here.

Steps for NPS withdrawal or exit request processing

To exit from the NPS scheme, whether it is the government or corporate scheme, subscribers must follow specific steps:

  • Firstly, subscribers must log into the CRA system (Central Recordkeeping Agency) to initiate the online exit request.
  • Once the request has been initiated, relevant notifications about e-Sign/OTP authentication, Nodal Office/POP authorization, etc. will be displayed.
  • After the request has been initiated, the NPS withdrawal form will auto-populate details such as bank information, address, and nominee details.
  • Subscribers can then select the fund allocation percentage for annuity and withdrawable corpus, annuity details, etc.
  • In addition, subscribers must use the penny drop verification to verify their bank account online.
  • While submitting the exit request, subscribers must upload KYC documents (proof of identity and address), a copy of the PRAN Card/ePRAN, and bank proof. It is essential to ensure that all scanned documents are legible.
  • Finally, subscribers can authorize the request using one of two options: OTP Authentication, whereby different OTPs will be forwarded to their phone number and email ID, or e-Sign, whereby they can e-Sign the request using their Aadhaar Card.

Subscribers have the option to withdraw from the National Pension System (NPS) either before or after reaching the retirement age of 60 to exit the pension scheme.

Upon exit, subscribers must use 40 percent of the accumulated amount to purchase an annuity from an Annuity Service Provider (ASP). The remaining amount can be withdrawn as a lump sum if it is less than INR 500,000.

FAQs on National Pension Scheme (NPS)

What is NPS?

The National Pension System is a social security program initiated by the Central Government that allows employees from various sectors except the armed forces to invest in a pension account at regular intervals. This program allows subscribers to withdraw a certain percentage of the corpus after retirement and receive the remaining amount as a monthly pension.

Initially, the scheme covered only Central Government employees who joined on or after January 1, 2004, but now, it is open to all Indian citizens on a voluntary basis. This scheme is particularly valuable for private sector employees who need a regular pension after retirement. It is portable across jobs and locations and offers tax benefits under Section 80C and Section 80CCD under the old tax regime.

What is the eligibility criteria to join NPS?

  • The NPS is available for Indian citizens (resident or non-resident) and Non-Resident Indians (NRI).
  • Individuals between the ages of 18 and 70 can join the NPS.
  • Applicants must comply with the Know Your Customer (KYC) norms specified in the application form.
  • Applicants must be legally capable of executing a contract as per the Indian Contract Act.
  • Overseas citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
  • NPS is an individual pension account and cannot be opened on behalf of a third person.

Who should invest in the NPS?

Investing in NPS is a good option for those who want to plan for their retirement early and have a low-risk appetite.

It is especially beneficial for individuals who retire from private-sector jobs and require a regular pension (income) in their retirement years.

The scheme can make a significant difference in their life post-retirement. Salaried individuals who aim to take advantage of the 80C deductions can also consider investing in this scheme.

What are the tax benefits of investing in NPS?

  • NPS offers tax benefits to both employees and self-employed individuals who contribute to the scheme.
  • Employees can claim tax deductions of up to 10 percent of their pay under Section 80 CCD(1), subject to a maximum of INR 150,000 under Section 80CCE, and an additional deduction of up to INR 50,000 under Section 80 CCD(1B).
  • Employers can also claim a tax deduction of up to 10 percent of their employees’ salary (Basic + DA) under Section 80 CCD(2), beyond the INR 150,000 limit provided by Section 80CCE.
  • Self-employed individuals can claim tax deductions of up to 20 percent of their gross income under Section 80 CCD(1), subject to a total limit of INR 150,000 under Section 80CCE, and an additional deduction of up to Rs. 50,000 under Section 80 CCD(1B).
  • Additionally, employers can claim a tax deduction on the amount contributed to their employees’ NPS accounts as a ‘Business Cost’ from the Profit & Loss Account under section 36(1)(iv)(a).
  • Partial withdrawals from an NPS account can enjoy tax exemption on up to 25 percent of self-contributions, subject to certain criteria under Section 10(12B) prescribed by PFRDA.
  • Purchasing an annuity or superannuation at the age of 60 can qualify for a tax exemption under Section 80CCD(5), but the income from the annuity is subsequently taxed under Section 80CCD(3).
  • Lump sum withdrawals of up to 60 percent of accrued pension funds upon reaching the age of 60 or superannuation are eligible for tax exemption under Section 10(12A).

What are the different types of NPS account?

There are two main types of accounts offered by NPS: tier I and tier II. While tier I is the default account, tier II is optional.

                  NPS Tier 1 

                      NPS Tier 2 

Any Indian citizen between 18 and 65 can open it. 

Any Indian citizen who has an active Tier 1 account. 

Minimum amount to start investing is INR 500. 

Minimum amount to start investing is INR 1,000.

Tier 1 accounts have a lock-in period until the investor turns 60. 

Tier 2 accounts don’t have any lock-in period. 

Section 80C of the Income Tax Act permits deductions for contributions up to INR 150,000 annually.
Section 80CCD(1B) allows for additional deductions of INR 50,000. 

Tier 2 contributions are not tax-exempted. 

For the first three years, withdrawals are not permitted. After that, you can take up to 25 percent of the fund’s value, but only for certain things.
When the account holder attains 60 years of age, 60 percent of the fund value may be withdrawn, with the remaining funds being utilized to buy an annuity.

The withdrawal and exit rules are flexible. The subscriber can withdraw funds anytime. 

Taxes are not applicable on 60 percent of the corpus, withdrawn at maturity.

The withdrawn funds are added to the investor’s income and are then taxed at the applicable income tax rate brackets.

It is feasible to move funds from Tier 2 to Tier 1 accounts. Moreover, funds from the EPF can be transferred to Tier 1.

Transferring funds is not permitted from an NPS Tier 2 account.

What are the NPS withdrawal rules from Tier 1 account?

  • Upon superannuation: After reaching 60 years of age, NPS subscribers are eligible to withdraw up to 60 percent of their total corpus as a lump sum, while the remaining 40 percent is allocated to an annuity plan. If the accumulated corpus is less than or equal to INR 500,000, subscribers can withdraw the entire amount without purchasing an annuity plan, and this withdrawal is also tax-free.
  • Premature exit: In case of a premature exit, before reaching the age of superannuation/turning 60, at least 80 percent of the accrued pension corpus must be used to purchase an annuity that provides a regular monthly income. If the total corpus is less than or equal to INR 250,000, the subscriber can opt for 100 percent lumpsum withdrawal.
  • Upon the death of the subscriber: Upon the subscriber’s death, the nominee/legal heir will receive the entire accrued pension corpus (100 percent).

Can subscribers withdraw money from their NPS Tier 1 account before maturity?

Individuals can make partial withdrawals from their NPS accounts. After completing three years, they can withdraw up to 25 percent of their contributions for specific reasons such as education, marriage, illness, disability, purchasing property or starting a new venture.

If they withdraw after five years, they can take out a maximum of 20 percent of the corpus as a lump sum. At least 80 percent of the corpus must be used to purchase an annuity plan to receive a pension. If the accumulated corpus is less than INR 250,000, the entire corpus is paid out as a lump sum.

However, government sector subscribers (central, state or central autonomous bodies) cannot use the self-declaration facility for partial withdrawals from January 1, 2023. Instead, they must apply through their associated nodal offices.

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