NPS Withdrawal: Rules, Process & Tax Implications

Learn how to withdraw your NPS funds.
NPS Withdrawal
3 min
25-April-2024

NPS, or the National Pension Scheme, is a voluntary retirement savings scheme introduced by the government in 2004. While NPS is a long-term retirement planning scheme, it does offer flexibility for partial and premature withdrawals.

NPS has two types of accounts: Tier 1 account (which is mandatory) and Tier 2 account (which is voluntary). National Pension System withdrawal rules vary based on the account type and nature of withdrawal—be it superannuation, premature, or partial.

NPS withdrawal limit for Tier 2 account

There are no limits on NPS Tier 2 account withdrawals since Tier 2 accounts are voluntary. In other words, subscribers can withdraw funds from a Tier 2 account as and when required to meet their needs. Tier 2 accounts function like savings accounts, allowing restriction-free withdrawals. While NPS withdrawal rules do not apply to Tier 2 accounts, you should note that voluntary Tier 2 investments are exempt from all the tax benefits under Section 80(C).

NPS withdrawal limit for Tier 1 account

As opposed to Tier 2 withdrawals, withdrawals from NPS Tier 1 accounts are subject to various rules and limits. As a subscriber, you are permitted to make partial and complete withdrawals only under certain conditions. Moreover, NPS Tier 1 withdrawals place a cap on the amount that can be withdrawn and the minimum lock-in period.

Also read: NPS interest rate

NPS withdrawal rules

  1. Partial premature withdrawal
    Partial NPS withdrawals are permitted for specific purposes like treatment of critical illness, children’s marriage, higher education, and construction or purchase of a home. According to the NPS withdrawal rules, up to 25% of your NPS contributions can be withdrawn after a minimum lock-in period of 3 years. Additionally, you can make a total of three partial withdrawals during the entire investment tenure, maintaining a minimum gap of 5 years between each partial withdrawal.
  2. Withdrawal at retirement
    Upon reaching superannuation at 60 years of age, at least 40% of the corpus should be used to buy an annuity plan to fund a regular post-retirement pension. You can withdraw the remaining 60% as a lump sum. If your NPS corpus at maturity is less than or equal to Rs. 5 lakh, you can withdraw 100% of the corpus as a lump sum.
  3. Withdrawal due to premature exit
    Premature exit from NPS is only permitted after 5 years. At least 80% of the NPS corpus has to be used to buy an annuity. The remaining 20% can be withdrawn as a lump sum. Both the lump-sum amount and annuity are taxable. However, if the corpus is less than or equal to Rs. 2.5 lakh, you can withdraw 100% of the corpus as a lump sum.
  4. Death of the subscriber
    In the case of private sector employees, 100% of the NPS corpus can be withdrawn by the legal heirs or nominees of the deceased subscriber. In the case of government employees, if the corpus is less than or equal to Rs. 5 lakh, it is paid to the nominees or legal heirs. However, if the corpus is more than Rs. 5 lakh, 80% goes to the dependent members for Default Annuity purchase and 20% as a lump sum to the nominees/legal heirs.

What is the process for withdrawal from NPS

NPS Tier 1 withdrawals

NPS Tier 1 accounts allow for easy online withdrawal request submissions. We have outlined the NPS online withdrawal process below:

Step 1: Visit the NSDL-CRA website
Step 2: Log in using your user ID (PRAN) and password
Step 3: Go to the ‘Transact Online’ tab and select the ‘Withdrawal’ option
Step 4: Select the ‘Partial Withdrawal from Tier 1’ option
Step 5: Enter the withdrawal reason and the specific percentage of funds you wish to withdraw
Step 6: Click on ‘Submit’

(Note: The steps outlined above pertain to partial withdrawals. Steps vary for superannuation and premature exits)

Upon successful submission, the system will generate a form. You have to submit this form along with the following documents to the nodal office:

  • PRAN Card
  • KYC documents
  • Bank account verification documents like passbook or cancelled cheque with details like account holder’s name, account number, IFSC, etc.
  • Advance stamp receipt that is cross-signed on the revenue stamp by the NPS account holder
  • Request-cum-undertaking form if the request pertains to maturity withdrawals

For offline NPS withdrawals, you can download the necessary form and fill in the relevant details. The duly filled form, along with the supporting documents mentioned above, must be submitted at the nearest Point of Presence Service Provider (PoP/PoP-SP).

NPS Tier 2 withdrawals

To withdraw funds from an NPS Tier 2 account, you need to submit a duly filled form UOS-S12 and other supporting documents to the nodal office or PoP-SP. Once the request is registered, the amount will be dispersed in 3 days.

What are the tax implications on NPS

The following tax benefits are applicable under the National Pension System Tier 1 accounts:

Section

Exemption details

Section 80CCD (1)

Rs. 1.5 lakh (under the overall tax exemptions available u/s 80CCE)

Section 80CCD (1b)

An additional benefit of Rs. 50,000 (above the 80CCE exemption limit)

Section 80CCD (2)

10% of basic salary+DA contributed by the employer


Additionally, partial withdrawals from NPS Tier 1 accounts qualify for tax deductions u/s 10 (12B). Both 60% of the lump-sum corpus and the amount used to purchase an annuity are tax-free. However, the annuity payments are taxed as per the applicable income tax slab. There are no tax benefits available under NPS Tier 2 accounts.

Conclusion

NPS serves as an ideal tool for retirement planning, allowing you to build a sizable market-linked corpus for steady income in your golden years. Acknowledging NPS withdrawal rules and tax implications allows you to better leverage this long-term investment to meet unexpected emergency expenses and save for the future.

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Frequently asked questions

Can I withdraw my NPS amount?

Yes. NPS Tier 1 accounts allow partial withdrawals of up to 25% after 3 years of investment for specific purposes.

Can I exit from NPS after 3 years?

Yes. Normal exit after 3 years is permitted. However, 40% of the corpus has to be used to purchase annuity, the rest may be withdrawn as a lump sum. 100% withdrawal is allowed if the corpus is less than or equal to Rs. 5 lakh.

Can I withdraw money from NPS if I quit my job?

NPS allows partial withdrawals only for specific reasons like critical illness, children’s marriage, higher education, etc. Job loss is not a valid reason for partial withdrawal. You can, however, make a premature exit from the NPS investment.

Disclaimer

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