NPS Withdrawal Rules for Tier 1 & 2: Explained

NPS or National Pension Scheme is a long-term voluntary investment plan for retirement. It is under the jurisdiction of the PFRDA (Pension Fund Regulatory and Development Authority) and the Central Government of India.

Withdrawal of NPS corpus is possible both as lump sum or annuity, per preference and eligibility after retirement, attaining 60 years of age.

This article will put forward NPS withdrawal rules along with examples to facilitate easy understanding of the same.

If you are an NPS subscriber, you can withdraw your NPS corpus prematurely and maturely, subject to meeting various parameters. Further, you can also make a partial withdrawal if any emergency arises. There are also corresponding withdrawal limits depending on the corpus, age, and other factors.

Read on to know whether you can withdraw the NPS amount before retirement.

New rules are waiting for implementation in case of partial withdrawal of NPS investments. In case you need some cash, you can make a tax-free partial NPS withdrawal as well. One can make an application either online or by submitting a partial withdrawal form to the POP service provider. However, they come with some stringent regulations. Some conditions under which one can make an NPS partial withdrawal are:

• The applicant should be an NPS subscriber for at least three years
• Withdrawal amount cannot exceed 25% of the total investment at that point
• Specific reasons under which one can apply for partial withdrawal:
  • Marriage of children
  • Higher education of children
  • Purchasing a house or flat by your name or sharing with your spouse. However, if the applicant already has a house/flat under his/her name, then it is not possible
  • Severe medical conditions like MS, organ transplant, cancer, kidney failure, etc
  • Life-threatening or serious accidents
  • Other illnesses as updated by PFRDA

For example, if a person’s NPS corpus stands at ₹3 lakhs, he/she can withdraw 25% of ₹3 lakhs, that is ₹75000. However, one can make a maximum of three withdrawals during NPS tenure, and a gap of five years between each partial withdrawal from NPS is mandatory.

Currently, a person can withdraw up to 60% of the total corpus as a lump sum, while one needs to subscribe to an annuity plan with the remaining 40%. According to the new rules of NPS, subscribers can withdraw the entire corpus if it is less than or equal to ₹5 lakhs without purchasing an annuity plan. These withdrawals are tax-free as well.

For example, if one has a corpus of ₹4.5 lakhs, he/she can withdraw the entire amount after retirement. However, if the corpus is over ₹10 lakhs, one can only withdraw up to ₹6 lakhs tax-free. He/she has to purchase an annuity plan for the remaining ₹4 lakhs.

Although withdrawals are tax-free, an annuity is however taxable as per the income slab. So, if your annuity is ₹4 lakhs, it will be taxable at that individual’s tax slab rate. The payment is taxable in correspondence with years of payment.

If one wishes to retire voluntarily before the age of superannuation, the person can voluntarily opt out of the NPS before tenure completion. However, certain rules apply. These are:

One needs to hold an NPS account for a minimum of 10 years to be eligible for NPS withdrawal before retirement.

If the corpus is less than or equal to ₹2.5 lakhs, a subscriber can withdraw the entire amount, according to new NPS premature withdrawal rules.

In case the corpus exceeds ₹2.5 lakhs, he/she can only withdraw a maximum of 20% of the corpus and purchase an annuity plan with the remaining 80%.

So, for example, if Mr X has an NPS corpus of ₹2.3 lakhs, he can withdraw the entire sum. On the other hand, if Ms Y has an accumulated NPS fund of ₹10 lakhs, she can only withdraw a maximum of ₹2 lakhs. The remaining ₹8 lakhs will be secured for an annuity.

Both this withdrawal format is taxable as per the income tax slab of Mr X and Ms Y. In the case of Ms Y, the annuity will be taxed with respect to payment, per her income tax slab.

Under the new rules, the maximum age to subscribe to NPS is now 70, up from 65, while the exit limit is now 75 years. Existing NPS subscribers can now opt to invest beyond 60 years of age, while their NPS account is extended to 70 years of age.

Further, the updated rules also allow staying for an extended period to generate a higher corpus. After maturity, one can defer the purchase of annuity or withdrawal of any NPS amount for up to three years from the time he/she turns 60 or reaches superannuation age, whichever is earlier.

When one withdraws the corpus amount, however, the same rules apply like that in the case of retirement. This means one can withdraw 60% of the corpus at maximum, while the remaining 40% will be used to purchase an annuity plan.

For example, if one has an NPS corpus of around ₹10 lakhs, withdrawal of up to ₹6 lakhs is tax-exempted. The remaining ₹4 lakhs will be used for an annuity. Although there is a tax for monthly pension, the annuity payment is taxable annually as per the income tax slab of the concerned individual.

In the event of the death of the NPS subscriber, the legal nominee/heir can withdraw the entire NPS corpus of the deceased subscriber in the case of private-sector employees. For government employees, purchasing an annuity plan is mandatory.

Rules are subject to the provisions made above in respect to age and other parameters, as mentioned previously.

Tier I

• NPS subscribers can choose partial withdrawal from Tier I corpus in specific situations. For instance, treatment of chronic health conditions, higher education, marriage of children, etc.

• An investor who has invested in NPS for 3 years, can withdraw a maximum 25% of the total contribution. 

• During the entire tenure an investor may apply three-times for partial NPS premature withdrawal.

• All partial withdrawals can be done free of cost.

Tier II

• Tier II withdrawal is only possible through POP-SP. The subscriber will need to fill the UOS – S12 form along with relevant documents. The POP then initiates the withdrawal process, and disbursal is completed within three days.

• Tier II accounts are voluntary accounts hence, it has no restrictions on withdrawals.

• An investor can withdraw any amount they desire for any purpose.

• Tier II accounts do not get tax benefits.

Mandatory documents necessary for NPS withdrawal are:

• Advance stamped receipt signed and filled, along with the revenue stamp of the concerned NPS subscriber
• Bank passbook, cancelled cheque, bank’s letterhead, bank certificate with proof of account holder name, number and IFSC code
• If eligible for complete withdrawal, then one also needs to submit an undertaking cum request form
• KYC documents
• Original PAN card

A subscriber can follow the following steps to check his/her status of NPS withdrawal:

One can check it through the Limited Access View (pre-log-in) functionality, available at the CRA website’s home page (www.cra-nsdl.com).

NPS withdrawal status is also possible to track under the ‘Exit Withdrawal Request’ and then select ‘Withdrawal Request Status View’ after logging in through the NPS portal.