National Pension Scheme (NPS) Rules for Tier 1 and Tier 2

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If you want to enjoy a peaceful life without financial worries after retirement, the key is to choose a suitable retirement investment plan. NPS, or National Pension System, is a dedicated retirement plan promising adequate finances and regular pensions during the golden years. This voluntary retirement savings plan lets you build a considerable corpus while enjoying lucrative tax benefits. However, understanding the NPS rules correctly is essential to making an informed decision regarding your investment. Here’s an overview.

What are the National Pension Scheme Rules?

The central government introduced the NPS scheme in 2004. Pension Fund Regulatory and Development Authority of India (PFRDA) is the regulatory body that introduces various NPS rules to oversee the scheme's operations. Therefore, the rules pertaining to the NPS scheme are called NPS scheme rules.

Eligibility Criteria of National Pension Scheme Rules

The PFRDA has laid down the eligibility criteria for joining NPS. These include the following:

Age Criteria: An aspiring subscriber should be from 18 to 70 years of age on the date of application.
Citizenship: The NPS scheme is open to all Indian residents, non-residents, and Overseas Indian citizens.
Compliance: Aspirants should comply with Know Your Customer (KYC) regulations and provide supporting documents.
Employment: All salaried employees and self-employed professionals working in organised or unorganised sectors are eligible to open an NPS account.

Contribution Guidelines of the National Pension Scheme

Depending on the type of NPS account, subscribers can open the account with an initial contribution of Rs. 500 for Tier I and Rs. 1,000 for Tier 2. NPS rules for subsequent contributions are as follows:

Tier I:

Minimum amount of contribution in a financial year: 1,000
Minimum amount per contribution: 500
Minimum number of contributions in a financial year: one

Tier II:

Minimum amount per contribution: 250
No minimum balance requirements

Over and above these minimum limits, subscribers can decide on their contribution amount and frequency at their convenience. A salaried subscriber's employer may also agree to contribute an equal amount to their employee's NPS account and enjoy significant tax benefits.

Withdrawal Rules of the National Pension Scheme

The normal age of superannuation is 60 years. That means the NPS contributions continue until the subscriber reaches 60. Upon maturity, they can withdraw their accumulated corpus or defer it until 70. However, suppose the subscribers need their money for an urgent expense like a medical emergency or a big-ticket purchase like a home buying. In that case, they can opt for a premature withdrawal with certain limitations. Consider these NPS scheme rules regarding withdrawal:

Premature Exit: If subscribers wish to close the NPS account before retirement or superannuation, they can withdraw only 20% of the accumulated corpus. They must use the remaining 80% to purchase an annuity. However, 100% withdrawal is allowed if the total wealth is less than Rs. 2.5 Lakh.
Death Claims: Upon the subscriber’s death, their legal heir or nominee can withdraw 100% of the corpus in a lump sum.
Partial Withdrawals: If the subscriber needs money during the tenure, they can prematurely withdraw up to 25% of their NPS balance. However, they must have completed at least three years in the scheme. However, 100% withdrawal is permissible if the corpus does not exceed Rs. 2.5 Lakh.

Only 20% and 60% withdrawals are possible for premature withdrawals and superannuation, respectively. The subscriber must spend the remaining 80% and 40% to purchase an annuity. Fund managers invest this amount in corporate bonds, government securities, and equity. The subscriber receives a regular monthly pension after retirement based on their returns.

NPS Investment Rules of National Pension Scheme

The PFRDA assigns fund managers to invest NPS funds in different schemes, including government securities, equities, and corporate bonds. Although investment in government securities and corporate bonds can be 100%, equities are only allowed up to 75%.

NPS subscribers have two investment options: auto and active. Auto choice affects the investor’s risk profile based on age. For instance, the older the account holder, the less risky their asset allocation. On the other hand, the active choice lets subscribers decide their asset allocation.

Maturity Benefits of the National Pension Scheme

Once subscribers reach retirement or superannuation, they can withdraw up to 60% of the accumulated corpus and invest the remaining 40% in an annuity. The lump sum withdrawal is tax-free. The annuity purchase is also tax-free, but income generated from the purchased annuity is taxable. You can use the maturity proceeds to achieve your financial goals or create an FD to earn additional interest.

NPS Exit Rules of National Pension Scheme

NPS subscribers can exit the scheme upon retirement or before maturity. At retirement, they can withdraw 60% of the total corpus as a lump sum and spend the remaining 40% on an annuity. The lump sum withdrawal and annuity purchase are tax-free. However, the income from an annuity is taxable according to the applicable tax slab rates.

NPS Taxation Rules of National Pension Scheme

Section 80CCD (1) offers a tax deduction of up to Rs. 1.5 Lakh per annum for both self-employed and salaried taxpayers. Section 80CCD (1B) provides an additional tax deduction of up to Rs. 50,000 for NPS contributions according to the old tax regime. Moreover, salaried employees can claim tax deductions from their employer’s NPS contributions.

Regarding withdrawals, up to 20% of withdrawal of the NPS corpus is tax-deductible under Section 10 (12B). A tax deduction on annuity purchases is also permissible upon retirement under section 80CCD (5). However, section 80CCD (3) makes income from the annuity investment taxable. These tax benefits are much better than those available with other investment schemes like EPF, PPF, etc.

Conclusion

Staying informed about the latest NPS scheme rules is crucial to effective retirement planning. Although the NPS rules impose certain limitations on NPS withdrawals, the contribution requirements are minimal, and tax benefits are considerable. Compared to many other retirement planning schemes in India, NPS is among the most excellent and lucrative investment plans for Indian citizens.

Frequently Asked Questions (FAQs)

Q: What is the rule of NPS?

The rules you must follow when operating an NPS account are called NPS rules.

Q: Can NPS be withdrawn anytime?

After completing three years of investment in the scheme, subscribers can withdraw 25% of the NPS funds for specific reasons like a critical illness, children’s marriage or education, disability, new start-up, or property purchase.

Q: Can I withdraw money from my NPS account before retirement?

You can withdraw money from your NPS account for specific reasons only.

Q: Can I withdraw 100% from NPS?

You can withdraw 100% from your NPS account only if the total corpus is less than Rs. 2.5 Lakh.

Q: Can Non-Resident Indians join NPS?

The NPS scheme is also available for NRIs, provided they have Indian citizenship.

Q: What happens to NPS if I quit my job?

The NPS scheme is 100% portable. That means you can retain the account, balance, and benefits even after quitting your job.

Q: What are the rules regarding purchasing an annuity at the time of retirement?

At retirement, you can withdraw 60% of the accumulated corpus and invest 40% in annuity purchases. This annuity lets you earn a regular monthly pension after retirement.

National Pension Scheme (NPS) Rules Explained - Tier 1 & Tier 2