National Pension Scheme or NPS is a voluntary savings scheme that helps individuals to accumulate savings for the retirement years. According to the current laws, withdrawals are not allowed before the person reaches the age of 60 years or attains the age of superannuation, except in specified cases. Withdrawals from the NPS are income tax exempt if the subscriber withdraws up to 40 per cent of the corpus on reaching the age of 60 years or attaining superannuation. Overall, an NPS subscriber can withdraw up to 60 per cent of the maturity corpus at the age of 60 years or on superannuation. The remaining amount has to be converted into annuity. The subscriber can choose to purchase an annuity for an amount greater than 40 per cent. An annuity is a financial product that gives you periodic income or pension. (Also read: How much income tax you can save)
NPS early exit
If the subscriber wants to exit NPS before reaching the age of 60 years, only up to 20 per cent of the corpus can be withdrawn and the rest has to be converted into annuity.
NPS - partial withdrawal
NPS allows partial withdrawals for specific purposes before the subscriber reaches the age of 60 years. An early withdrawal is allowed up to 25 per cent of one's contribution. In addition, the subscriber is allowed to withdraw a maximum of three times during the entire tenure of subscription under NPS. Partial withdrawals allowed at an interval of not less than a period of five years.
Subscribers after 10 years become eligible for an early, partial withdrawal under specific circumstances such as children's higher education or marriage, construction/purchase of house and treatment of critical illness (for self, spouse, children or dependant parents).
Withdrawal of 25 per cent of the contribution made by a subscriber has been exempted from income tax, according to Budget 2017. This change will take effect from April 1, 2018 and will accordingly apply in relation to the assessment year 2018-2019 and subsequent years.
NPS income tax benefits
Income Tax Benefits For Salaried Individuals
An investment up to 10 per cent of salary (basic + dearness allowance) is deductible from taxable income under Section 80CCD (1) of the Income Tax Act in a financial year, subject to a limit of Rs 1.5 lakh under Section 80C.
Additional NPS income tax benefits for salaried individuals
An additional investment up to Rs.50,000 is also deductible from taxable income under Section 80CCD (1B).
Contribution routed through employer
Under the NPS corporate model, an employee can deposit the contribution directly or route the contribution through the employer he or she is working with. For investment routed through employer, the employer's contribution to NPS up to 10 per cent of basic salary (plus DA) is allowed deduction under Section 80CCD (2). There is no cap for this deduction but the total deduction claimed for contribution by the employer should not exceed 10 per cent of the salary.
For self-employed professionals, investment up to 20 per cent of gross annual income is deductible from taxable income, subject to a limit of Rs 1.5 lakh. In Budget 2017, with an aim to bring parity in tax benefits, this limit for self-employed professionals was increased to 20 per cent of gross income, from 10 per cent earlier. This amendment will take effect from April 1, 2018 and will accordingly apply in relation to the assessment year 2018-2019 and subsequent years.
Additional income tax benefits for self-employed
Additionally, an investment up to Rs.50,000 is deductible from taxable income under Section 80CCD (1B) of the Income Tax Act, 1961.