If you withdraw money from a Tier 2 NPS account, you are not liable for tax exemption.
The National Pension Scheme (NPS) is a voluntary retirement scheme that allows beneficiaries to facilitate savings and have a secured income post-retirement. This scheme is under the jurisdiction of the PFRDA (Pension Fund Regulatory and Development Authority) and the Government of India.
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If you are an NPS subscriber, you can withdraw money maturely or prematurely with certain parameters, and you will also be allowed to withdraw some amount in case of an emergency. Under this scheme, you are allowed to open two types of accounts: Tier 1 and Tier 2. It also includes an income tax exemption.
Tier 1 NPS accounts are default accounts for retirement savings. The minimum contribution required to open the account is Rs 500, and a Tier 2 NPS account is a voluntary savings account. To open a Tier 2 account, the amount required is Rs. 1000. If you want to utilise the advantage of tax exemption, then you are required to choose a Tier 1 account. It was initially launched for government employees but was made available for all later.
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Tax benefits
Tier 1, the account holders under this scheme, get a benefit of tax savings up to Rs 1.5 lakh under Income Tax Act 80C and Rs 50,000 under 80CCD (1B). If you are a salaried employee, you are allowed to invest up to 10% of your salary and claim an exemption on the invested amount. Section 80 CCD(1) allows for a tax deduction of up to 10% of salary (Basic + DA), subject to a ceiling of Rs 1.50 lakh under Section 80CCE.
If you are self-employed, you are allowed to invest up to 20% and claim tax exemption. Section 80 CCD (1) allows for a tax deduction of up to 20% of gross income, subject to a total ceiling of Rs 1.50 lakh under Section 80CCE.
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Withdrawals
The rules to withdraw the amount from both Tier accounts are different. Tax exemption is only allowed for up to 25% of the total amount invested. Tax exemption for sums taken up to 25% of self-contribution, subject to the PFRDA’s rules and circumstances under section 10(12B). You can withdraw your money from a Tier 1 account before the age of 60 as a voluntary retirement. Section 10 provides for a tax exemption on a lump sum withdrawal of 60% of accrued pension funds when the individual reaches the age of 60.
If you are withdrawing money from a Tier 2 account, you are not liable for tax exemption. You need to pay tax on your withdrawal. Tax needs to be paid according to your chosen tax slab. Following the death of the subscriber, the entire accrued pension corpus (100%) is given to the subscriber’s nominee/legal heir.
