National Pension Scheme: Tiers, Tax Benefits and Withdrawal Rules
Why in the news
Explainer on how NPS works as a retirement tool, with its tax treatment and exit rules.
About NPS accounts
| Feature | Tier-1 | Tier-2 |
|---|---|---|
| Status | Mandatory, default pension account | Optional |
| Purpose | Long-term retirement corpus | Short-term goals, savings-like |
| Equity | – | Up to 100% |
| Transfers | – | To Tier-1 or bank account; reverse not allowed |
Tax benefits
- Old regime: extra ₹50,000 a year under Section 80CCD(1B) for Tier-1.
- New regime: no deduction on self-contribution; employer contribution deductible under 80CCD(2), up to 14% of basic salary.
Withdrawal rules
- Partial: after 3 years, up to 25% of contributions for health, education, marriage, property or business; maximum 3 times with a 5-year gap.
- Premature exit before 60: 20% lump sum, 80% into an annuity; annuity optional if corpus is below ₹2.5 lakh.
- Death: full corpus to nominee or legal heir; government employees must buy an annuity for dependents, private employees may choose.
- Deferral: lump sum (60%) or annuity (40%) can be delayed until age 75.
Exam angle
- Sections: 80CCD(1B) and 80CCD(2).
- Key limits: 25% partial withdrawal, ₹2.5 lakh annuity threshold.