The National Pension System (NPS) is a government-backed pension scheme in India designed to provide a secure retirement corpus for individuals. With its flexible investment options and tax benefits, NPS has grown increasingly popular among salaried and self-employed professionals. However, like most financial products, the NPS withdrawal rules come with specific conditions and regulations that every investor must be aware of.
In this blog, we will explore the detailed NPS withdrawal rules, the process for how to withdraw from NPS, and the conditions associated with these withdrawals.
Overview of the National Pension System (NPS)
Before we delve into the specifics of the NPS withdrawal rules, it’s essential to understand how NPS works. The NPS is a long-term retirement-focused investment plan where individuals contribute to a pension account during their working years. Upon retirement, a portion of the accumulated corpus can be withdrawn, while the remaining amount must be used to purchase an annuity to ensure a steady income post-retirement.
Types of NPS Accounts
There are two types of accounts under the NPS scheme:
- Tier I Account: This is the primary pension account with tax benefits and restrictions on withdrawal.
- Tier II Account: This is a voluntary savings account, offering greater flexibility in withdrawals but without tax benefits.
NPS Withdrawal Rules Explained
One of the most important aspects of NPS is its withdrawal process. The NPS withdrawal rules are designed to ensure that individuals use the accumulated funds primarily for post-retirement income. There are different withdrawal scenarios based on the age, tenure, and contributions made by the account holder.
1. Withdrawal on Retirement
The most common withdrawal scenario is when an individual reaches the age of retirement, which is typically set at 60 years. According to the NPS withdrawal rules, an investor must follow these conditions upon retirement:
- 60% Lump Sum Withdrawal: Upon retirement, you are allowed to withdraw up to 60% of the total corpus as a lump sum. This amount is tax-free, as per current tax laws.
- 40% Annuity Purchase: The remaining 40% of the corpus must be used to purchase an annuity plan, which will provide a regular income during retirement. The annuity income is taxable as per the individual’s tax slab.
- Complete Withdrawal Option: If the total NPS corpus is less than ₹5 lakh at the time of retirement, the individual can withdraw the entire amount without the obligation to purchase an annuity.
For example, if your NPS corpus at retirement is ₹10 lakh, you can withdraw ₹6 lakh tax-free and invest ₹4 lakh in an annuity plan.
2. Withdrawal Before Retirement
While NPS is designed for long-term retirement savings, there are circumstances where premature withdrawals are allowed. However, the NPS withdrawal rules impose certain conditions:
- Up to 20% Lump Sum Withdrawal: If you wish to exit the NPS before the age of 60, you can withdraw up to 20% of the corpus as a lump sum.
- 80% Annuity Purchase: The remaining 80% of the corpus must be used to purchase an annuity to ensure post-retirement income.
- Complete Withdrawal Option: If the corpus is less than ₹2.5 lakh, you are allowed to withdraw the entire amount without the requirement to purchase an annuity.
Premature withdrawals from NPS are typically not encouraged unless absolutely necessary, as they can significantly reduce the post-retirement benefits.
3. Partial Withdrawal
Partial withdrawals from NPS are allowed under specific circumstances, but they are subject to strict regulations. Here are the NPS withdrawal rules regarding partial withdrawals:
- Eligibility: Partial withdrawals are allowed only after completing 3 years in the NPS scheme.
- Purpose: Withdrawals are permitted for specific reasons such as higher education, marriage of children, purchase or construction of a house, or treatment of specified critical illnesses.
- Withdrawal Limit: You can withdraw up to 25% of your contributions (not the total corpus) for the specified purposes.
- Number of Withdrawals: An individual can make up to three partial withdrawals during the entire tenure of the NPS account.
These partial withdrawals offer flexibility to meet critical life events without prematurely closing the account.
How to Withdraw from NPS
The process of how to withdraw from NPS is relatively straightforward but requires some formalities to be completed through your nodal office or Point of Presence (POP) or the online platform for NPS account holders. Here’s a step-by-step guide on how to withdraw from NPS
- Submit Withdrawal Request: You need to submit a withdrawal request online through the NPS portal (CRA) or by visiting the nearest Point of Presence.
- Complete the KYC Process: During the withdrawal process, you must complete the KYC formalities. This includes submitting identity proof, address proof, and a copy of your NPS account statement.
- Annuity Selection: If you’re withdrawing at retirement or pre-retirement age, you need to choose an annuity provider and an annuity plan. The available options will be provided by insurance companies registered with the PFRDA (Pension Fund Regulatory and Development Authority).
- Funds Disbursal: Upon approval of your withdrawal request, the lump sum amount is credited to your registered bank account, while the rest is used to purchase the annuity plan you selected.
By following these steps, individuals can ensure a hassle-free withdrawal experience from their NPS accounts.
NPS Withdrawal Conditions for Tier II Accounts
For Tier II accounts, withdrawals are much more flexible. There are no restrictions on the number of withdrawals or the amount that can be withdrawn. However, Tier II withdrawals do not provide any tax benefits, and the returns are subject to capital gains tax.
NPS Taxation Rules
One of the primary benefits of investing in NPS is the tax advantage it offers:
- Tax Deduction on Contributions: Investments in NPS Tier I are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C. Additionally, under Section 80CCD(1B), an additional deduction of ₹50,000 is available.
- Tax-Free Withdrawal: The lump sum withdrawal of up to 60% at retirement is tax-free.
- Taxable Annuity Income: The annuity income drawn after retirement is subject to tax according to the individual’s tax slab.
Statistics on NPS Withdrawal and Participation
The NPS has grown significantly in popularity over the past few years. According to the Pension Fund Regulatory and Development Authority (PFRDA), the total number of subscribers under NPS crossed 4.88 crore in 2023. Additionally, the total assets under management (AUM) in NPS have surged to ₹9.26 lakh crore as of December 2023.
This highlights the importance of understanding the NPS withdrawal rules to maximize the benefits of your NPS investments.
Final Thoughts on NPS Withdrawal Rules
The NPS withdrawal rules are designed to provide financial security to individuals post-retirement. While the conditions might seem stringent at first, they ensure that the corpus accumulated in the NPS account is used for its intended purpose: providing a stable and secure income during retirement. By understanding the various withdrawal options, such as full withdrawals upon retirement, partial withdrawals, and premature exits, investors can make informed decisions about their retirement savings.
In conclusion, NPS is a long-term retirement investment vehicle with substantial benefits, and being aware of the NPS withdrawal rules, and how to withdraw from NPS while following the prescribed NPS withdrawal conditions, can make a significant difference in your post-retirement financial planning.
For those who want to monitor their NPS accounts effectively, tools like the TrackMyPF Balance by Finnable apps offer a seamless experience in managing and tracking your investments.
