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With an increase in the lifespan comes the additional burden of achieving financial independence post retirement. Pension plans are devised to facilitate the sustainable living of people beyond their working years. The need to create an Indian alternative to the 401k retirement fund option available in the United States of America gave rise to the National Pension System which is regulated by the PFRDA (Pension Fund Regulatory and Development Authority). This article talks about Partial Withdrawal of NPS Corpus.

Why should I choose the National Pension System?

It is a system which encourages continual savings during work years to create a sizeable corpus post retirement, and acts as a saving investment tool. Created by the government in order to encourage savings and enable financial security post retirement, this scheme has several benefits to offer even to low income earners.

What is NPS Corpus?

Regular investments create a pool in the NPS account, which is designed to support you with pension in your senior years.

The NPS corpus refers to the accumulated amount invested in the account over the years. A minimum of 40% of the total corpus must be converted to an annuity at the time of maturity. This annuity is beneficial in generating a regular monthly pension.

A major NPS tax benefit under Section 80CCD is an additional tax deduction of Rs. 50,000 contributed to the account during any financial year. At the time of maturity, the withdrawal of the 60% accumulated corpus, 40% is tax free.

E.g.:

  • Your accumulated corpus is Rs. 100
  • 40 goes towards the annuity scheme, and Rs. 60 is your maturity withdrawal amount
  • 40% of Rs. 100 i.e. Rs. Rs.40 is exempted from tax payment at the time of maturity

Partial withdrawals of NPS

What are partial withdrawals of NPS?

With the new modifications, it is now possible to make certain partial withdrawals under the National Pension System as opposed to the earlier rule which stated withdrawal only on maturity. One can only avail of this offering after being enrolled in NPS for minimum 10 years, and withdrawal can be up to a maximum of 25% of the contribution.

Another change in the NPS system is the creation of Tier II accounts, which one can enjoy after having the mandatory Tier I account. Tier I account is your primary NPS account, with restrictions in withdrawal. Tier II account acts as an additional savings tool, with no limitations on withdrawal, and can be used as a liquid version of the Tier I NPS account.

When can I make partial withdrawals?

Partial withdrawals can be made from Tier I account up to three times during the entire period, and must have a minimum 5 year gap between them. This is however, not applicable for critical illnesses.

Termed as ‘defined expenses’ the situations that allow one to withdraw partially include but are not limited to:

  1. Higher education for your children; it is applicable for legally adopted children
  2. Wedding of your children; it is applicable for legally adopted children
  3. Construction or the purchase of your house; this is only applicable for ‘first house’ purposes. The house can be in the benefactor’s name, or joint with their spouse.
  4. In case of critical illness; it extends to dependent parents, the spouse, offspring, and legally adopted children. Some of the conditions include
    • Cancer
    • Paralysis
    • Multiple Sclerosis
    • Heart Valve Surgery

How do I make a partial withdrawal in NPS?

Currently, the online support for making partial withdrawal claims is still in the developmental stage.

The process of application is elaborated below:

  1. If you intend on withdrawing before maturity period, you would have to do it the old fashioned way – through big banks that act as POP i.e. Points of Presence, which are integral to the process.
  2. While filling a withdrawal form, you have to mention the reason and attach some form of proof, as well as the percentage of sum you wish to withdraw.
  3. The bank shall verify your claim, and conduct a thorough check and subsequently passes it on to Central Record Keeping Agency (CRA).
  4. General claims are submitted within three working days, while an emergency critical illness claim is passed on the day of application itself.
  5. The CRA registers your claim and processes it.
  6. The amount is credited to your account within three working days.

Not only a tax saving schemes or investment, the National Pension System is also an extremely low cost and therefore wise financial product. To accurately chart out a financial plan, use a tax calculator which takes into account your age, income and other essential variables.

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