The National Pension Scheme (NPS)

Context:

The National Pension Scheme (NPS) is a vital financial tool for retirement planning in India, offering tax incentives and a pension corpus. It has two types of accounts: Tier-1 (mandatory) and Tier-2 (optional), each designed for different purposes:

• Tier-1 Account: This is the default pension account for long-term retirement savings. It is intended to build a corpus that provides a pension upon retirement.
• Tier-2 Account: This works like a savings account and offers greater flexibility with higher equity exposure (up to 100%). It’s ideal for individuals who wish to invest without the long-term commitment of Tier-1.

Tax Benefits

• Tier-1: Subscribers can claim an additional tax deduction of ₹50,000 per year under Section 80CCD(1B) of the Income Tax Act under the Old Tax Regime (OTR).
• New Tax Regime (NTR): Self-contributions are not eligible for tax deductions, but employer contributions to NPS are deductible under Section 80CCD(2), up to 14% of the basic salary.

Withdrawal Options

• Partial Withdrawal: After 3 years, you can withdraw up to 25% of your contributions for specific reasons like:
  • Health conditions
  • Education
  • Marriage
  • Property purchase
  • Starting a business
  Note: There is a limit of 3 withdrawals during the entire tenure, with a mandatory 5-year gap between each withdrawal.
• Premature Withdrawal:
  • If the NPS account is closed before 60, only 20% of the corpus can be withdrawn as a lump sum.
  • The remaining 80% must be used to purchase an annuity pension plan.
  • If the corpus is below ₹2.5 lakh, purchasing an annuity is optional.
• Death Benefits:
  • In case of death, the entire corpus is paid to the nominee or legal heir.
  • Government employees must buy an annuity for their dependent, while private sector employees can choose between an annuity or a lump sum.
• Deferring Withdrawal:
  • Subscribers can defer the withdrawal of their 60% lump sum or 40% annuity until the age of 75, allowing their investments to grow for a longer period.

Flexibility

• Tier-2 Account allows flexibility with 100% equity exposure and can be used for short-term goals, unlike Tier-1, which is strictly for retirement.
• Funds can be transferred from Tier-2 to Tier-1 or to a bank account. However, the reverse is not allowed.

The National Pension Scheme (NPS) continues to be a cornerstone for retirement planning, offering tax benefits, investment flexibility, and various withdrawal options. While the increased no-tax limit under the New Tax Regime might reduce the immediate tax benefits, the long-term benefits of the scheme especially its diverse investment options and flexible withdrawal choices ensure it remains a valuable tool for building a retirement corpus.

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