Starting your journey towards retirement planning with the National Pension Scheme (NPS) can be a wise move for securing your financial future. NPS comes with considerable perks, like a monthly pension post-retirement, which is eligible for tax deductions. As you navigate how NPS works, understanding its intricacies becomes pivotal.
Recently, the Pension Fund Regulatory and Development Authority (PFRDA) introduced new guidelines for partial withdrawals, effective from February 1, 2024. These rules, aiming to streamline NPS partial withdrawals, bring changes to how you can access your investments.
So, what are the new changes in NPS partial withdrawals, and how can you access them? Let us find out.
How does the National Pension Scheme (NPS) work?
The National Pension Scheme, or NPS, is a long-term retirement savings plan that increases your pension wealth through effective investment over your tenure in the scheme. With NPS, you access an affordable, tax-efficient retirement savings account that is adaptable and easy to manage. You contribute to your retirement fund, and your employer may also contribute to your social security, which gains returns over time.
NPS operates on a defined contribution basis, meaning there is no guaranteed benefit upon exiting the system. So, the more you invest, the more your investments grow, and the longer they accumulate, the greater your eventual pension wealth is expected to be. The age of superannuation, or maturity, ranges from 60 to a maximum of 75.
Upon turning 60, you have to use a minimum of 40% of your pension savings to buy an annuity for a monthly pension, with the rest as a lump sum. However, if your total savings are less than or equal to Rs. 5 lakh, you can withdraw the entire amount. If you exit before 60, 80% goes to the annuity, with the remainder as a lump sum, and you can exit the NPS after 5 years. If your savings are less than or equal to Rs. 2.5 lakh, you can withdraw 100% of the amount. In the event of the account holder’s death, the entire savings go to the nominee or the legal heir. However, if you do not wish to withdraw any amount at 60, you can opt for continuation until 75 years of age.
What are the new NPS rules for partial withdrawal in 2024?
On January 12, 2024, the Pension Fund Regulatory and Development Authority (PFRDA) released a master circular stating the new NPS partial withdrawal rules. According to the new rules, effective February 1, 2024, you can only withdraw a maximum of 25% of your investments, excluding your employer’s contributions and any investment returns.
This partial withdrawal is only permissible after your account has aged 3 years, and you are limited to three withdrawals during the entire tenure. Following your initial withdrawal, subsequent withdrawals can only occur after 5 years and are limited to your additional contributions. However, this 5-year gap does not apply in cases where a withdrawal is made for the treatment of specified illnesses.
Let us understand with an example.
If you invested Rs 300,000 in the initial 3 years of your NPS investment, you qualify for a loan of 25% of that amount, which equals Rs 75,000.
A second withdrawal depends on the corpus invested between withdrawals. So, if you have already withdrawn Rs 75,000 initially and subsequently invested another Rs 400,000 over the following 5 years, you can only withdraw 25% of that new amount, not the entire sum. This means you can withdraw Rs 100,000 during your second withdrawal.
What are the eligibility criteria for NPS partial withdrawals?
Although you can withdraw up to 25% of your NPS investment, there are limitations to the purpose of these withdrawals. You can only withdraw an amount for the following purposes:
- You can fund your child’s future education or cover their wedding expenses. This includes legally adopted children.
- If you are buying your first independent or joint house, you can use your NPS funds. However, this is not applicable if you already own a house under your name.
- You can finance medical conditions such as cancer, kidney failure, pulmonary arterial hypertension, surgeries, strokes, coma, life-threatening accidents, and COVID-19, to name a few. This also includes hospitalisation and treatment expenses related to these illnesses.
- This coverage extends to disabilities or incapacitation, covering your medical and incidental expenses.
- You can use the funds for your skill development, re-skilling, or other self-development activities.
- You can also establish ventures or startups by using your NPS for financial aid.
How to apply for a partial withdrawal from NPS?
To apply for a partial withdrawal from your NPS, you need to submit a withdrawal request accompanied by a self-declaration stating the purpose of the withdrawal. This request should be submitted to the central recordkeeping agency (CRA) through your Government Nodal Office or Point of Presence. If you are suffering from any illness specified in section 6(d) of this master circular, a family member can submit the withdrawal request on your behalf.
Upon receiving your withdrawal request, the Point of Presence or Government Nodal Office will identify the beneficiary. The CRA will process partial withdrawal requests only after successfully verifying your bank.
Conclusion
While you might be eligible to enjoy the benefits of partial withdrawals from an NPS, remember that the primary objective of an NPS is to financially secure you during your retirement. Every withdrawal you make reduces the corpus you receive after maturity. So, it is advisable to be mindful of your withdrawals and only turn to your NPS when they are extremely urgent.
You can secure yourself financially with other options like health insurance and life insurance, which provide financial aid when necessary. The NPS has significant long-term benefits, considering the tax exemptions and returns, so make sure you manage it wisely.
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