Here’s a simplified breakdown of the NPS, with an example for clarity:

Types of NPS Accounts:

NPS Tier-1 Account (Pension Account)

• Mandatory: You must have this account to join NPS.
• Tax Benefits: Contributions are tax-deductible.
• Minimum Contribution: ₹500 initially.

NPS Tier-2 Account (Investment Account)

• Optional: You can choose to have this in addition to the Tier-1 account.
• No Tax Benefits: But you can withdraw money anytime.
• Minimum Contribution: ₹1,000 initially.

Flexibility in Investments:

• Choose a Pension Fund Manager (PFM): You can select and change your PFM once a year.
• Asset Allocation: Decide how to distribute your investments. This can be changed up to four times a year.

Tax Benefits:

• For Employee Contributions: Save taxes under sections 80CCD (1B) and 80CCE.
• For Employer Contributions: Get tax deductions under section 80CCD (2).

Withdrawal Options:

At 60 years old:

• Withdraw up to 60% of your savings as a lump sum (tax-free).
• Invest at least 40% in an annuity for regular income.
• If your total savings are ₹5 lakhs or less, you can withdraw everything.

Before 60 years old (after 5 years):

• Withdraw up to 20% as a lump sum.
• Invest 80% in an annuity.
• If savings are ₹2.5 lakhs or less, withdraw everything.

Partial Withdrawals:

• Up to 25% of your contributions can be withdrawn after 3 years
• Maximum of three withdrawals allowed during the entire period.

Example:

Suppose Rahul, a 30-year-old, joins NPS and chooses a Tier-1 account. He initially contributes ₹500 and decides to invest ₹2,000 every month. He chooses a PFM and sets his investment preferences.

By the time he’s 60, Rahul’s total savings in the NPS are ₹10 lakhs. He decides to withdraw 60% (₹6 lakhs) as a lump sum and uses the remaining 40% (₹4 lakhs) to purchase an annuity, which gives him a regular pension.

If Rahul needs money for an emergency at 45, he can make a partial withdrawal. Since he’s been contributing for more than 3 years, he’s eligible to withdraw up to 25% of his contributions.

Terms Used:

• Section 80CCD(1B): This is a section of India’s Income Tax Act. It allows you to claim an additional tax deduction for the amount you contribute to your National Pension System (NPS) account, over and above the standard ₹1.5 lakh limit under Section 80C. The maximum extra deduction you can claim under Section 80CCD(1B) is ₹50,000. So, if you contribute ₹50,000 to your NPS, you can reduce your taxable income by this amount, saving you money on taxes.
• Section 80CCE: This section puts a cap on the total tax deduction you can claim under certain sections, including 80C, 80CCC, and 80CCD (1). The maximum limit is ₹1.5 lakhs. It means that when you add up all your investments and expenses that are eligible for tax deductions under these sections (like life insurance, Public Provident Fund, NPS, etc.), the total amount you can claim to reduce your taxable income cannot exceed ₹1.5 lakhs.
• Section 80CCD (2): This section specifically deals with the employer’s contribution to an employee’s NPS account. If your employer contributes to your NPS, you can claim a tax deduction for this contribution under Section 80CCD (2). The limit for this deduction is the lower of the following: 10% of your salary (basic plus dearness allowance) or the actual employer contribution. This deduction is over and above the ₹1.5 lakh limit under Section 80CCE.