What is the National Pension Scheme (NPS) lock in period?

Retirement planning is a crucial step towards achieving financial independence. The National Pension Scheme (NPS) is widely regarded as an effective tool for building a secure retirement fund. A significant aspect of this scheme is the NPS lock-in period, which is essential in shaping your long-term savings strategy.

What is the NPS lock-in period?

The NPS lock-in period refers to the duration during which your investments are inaccessible until you turn 60. This structure ensures that your funds remain secure for retirement purposes. However, NPS offers some flexibility with partial withdrawals provided you should be invested in NPS for at least three years. You can withdraw up to 25% of your contributions for specific purposes like higher education, marriage, home purchase, or treating critical illnesses. Throughout the investment tenure, you can make partial withdrawals up to three times, with a minimum gap of at least five years between each withdrawal.

Benefits and implications of the NPS lock-in period

• Returns: NPS investments are diversified across equities, government bonds, and corporate debt, offering returns linked to market performance. The NPS lock-in period allows your investments to compound over time, mitigating short-term market volatility and enhancing long-term growth.
• Risk management: With a longer investment horizon, the National Pension Scheme lock-in period helps to smooth out market fluctuations, allowing your investments to recover and grow consistently over time.
• Regulation: The NPS lock-in period is governed by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring that your investments are managed with a focus on prudence, long-term growth, and security.
• Flexibility: Despite the extended lock-in, NPS provides significant flexibility. Subscribers can choose between active and auto investment options and can switch between different pension fund managers. This flexibility enables you to tailor your retirement planning to match your risk tolerance and financial objectives, even within the NPS locking period.
• Tax benefits: The NPS lock-in period is accompanied by attractive tax benefits under various sections of the Income Tax Act. These deductions can substantially reduce your taxable income, helping you save more as you build your retirement corpus.

Taxation Benefits of NPS

• Section 80CCD(1): Contributions made by employees towards NPS are eligible for a tax deduction of up to ₹1.5 lakh under Section 80CCD(1), within the overall ceiling of Section 80C.
• Section 80CCD(1B): Additionally, an extra deduction of ₹50,000 is available under Section 80CCD(1B) for voluntary contributions to NPS, over and above the Section 80C limit.
• Section 80CCD(2): Employer contributions to your NPS account, up to 10% of your salary (Basic + DA), are also deductible from your taxable income. This deduction is in addition to the ₹1.5 lakh limit under Section 80C, providing significant tax-saving opportunities.

NPS annuity

Upon reaching the age of 60, the accumulated pension wealth is partially used to purchase an annuity plan, which provides a regular income during retirement. At least 40% of the corpus must be allocated for this purpose, while the remaining 60% can be withdrawn as a lump sum, which is tax-free.

Also Read: How to invest in NPS (National Pension System)?

Conclusion

The NPS lock-in period is a vital feature that ensures the growth and security of your retirement fund. It encourages disciplined long-term savings, offers the potential for significant returns, and provides valuable tax benefits. By understanding and planning around this lock-in period, you can make the most of your NPS investment and secure your financial future.

Choosing an Axis Bank NPS Account further enhances your retirement planning. It offers features such as portability, low-cost investment options, exclusive tax benefits, and the flexibility to select from various fund options and asset allocations.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision