Understanding the Key NPS Withdrawal Rules for Indian Investors

How Does NPS Work?

When you join the NPS, you're assigned a unique Permanent Retirement Account Number (PRAN). This number is used to access your NPS account, where you can contribute funds regularly. These funds are then invested in your chosen pension fund schemes.

You can choose between two types of NPS accounts: Tier I and Tier II. Tier I account is a mandatory account that acts as the primary account for your pension. offers tax advantages. A Tier II account is an optional account with more flexibility in terms of withdrawals, but it doesn't offer the same tax advantages.

Here's how the National Pension System works:

The NPS allows subscribers to invest in select professionally managed pension funds in different asset classes linked to markets. These asset classes include:

- Asset class E : Equity and equity-related instruments

- Asset class C : Corporate debt and debt-related instruments

- Asset class G :Government bond and other government back securities

- Asset class A : Alternative investments like Commercial Mortgage-Backed Securities (CMBS), Real Estate Investment Trusts (REITS), Infrastructure Investment Trusts (InvIts), venture capital funds etc.

This means that the returns from the NPS will be dependent on how these markets perform. You can choose the amount you wish to invest, providing flexibility in terms of your financial planning.

The NPS offers a range of tax benefits* which make it as good as an EEE (exempt, exempt, exempt) investment. Firstly, you can claim a tax deduction of up to Rs. 50,000 under Section 80 CCD (1B) which is over and above 80C and up to Rs. 1,50,000 under Section 80 CCE. This sums up to a total tax rebate of Rs. 2 lahks (under Old tax regime). Also, the 60% lump sum withdrawal and annuity on exit are tax-exempt. Furthermore, if you're a salaried individual, you're eligible for tax benefits* on your employer's contribution to your NPS account. The tax deduction for this is up to 10% of salary (Basic + DA) under Section 80 CCD (2) under old Tax regime and 14% of Salary (Basic + DA) under new tax regime.