NPS Withdrawal Rules for Tier 1 & 2

The Indian government introduced the National Pension Scheme (NPS) as a long-term investment scheme to simplify the process of retirement planning for Indian citizens. As a market-linked investment scheme, NPS helps subscribers build a sizable corpus over time and enjoy tax-efficient returns. The scheme also offers some flexibility to investors in terms of partial and premature withdrawal options under special circumstances. Moreover, withdrawals at maturity are also governed by certain rules and regulations.
 

In this article, we will discuss the various NPS withdrawal rules to help you better manage your investment.

What are NPS withdrawal rules

Withdrawal rules for NPS (National Pension Scheme) vary depending on when the withdrawal request is made. The Pension Fund Regulatory and Development Authority (PFRDA) formulates and regulates NPS withdrawal rules governing different circumstances and varying categories of NPS investors. Let’s review the latest National Pension Scheme withdrawal rules:

1. NPS withdrawal rules for corporate and government employees upon retirement
   Both corporate and government employees can withdraw 60% of the accumulated corpus as a lump sum upon retirement at the age of 60. The remaining 40% must be used to purchase an annuity offered by NPS. If the corpus is less than equal to Rs. 5 lakhs, the entire amount can be withdrawn as a lump sum.

2. NPS withdrawal rules for corporate and government employees taking voluntary retirement
   NPS withdrawal rules are different for individuals seeking to take voluntary retirement before the age of 60. In such cases, they can withdraw up to 20% as a lump sum, while the remaining 80% of the corpus must be used for annuity purchase. This NPS withdrawal option can be exercised only after the lapse of the first 5 years. Additionally, if the corpus is less than Rs. 2.5 lakhs, the entire amount can be withdrawn in a lump sum.

3. NPS withdrawal rules related to the death of corporate employees
   If the NPS subscriber dies before attaining retirement age, the entire corpus is paid to the subscriber’s nominee or legal heir. The subscriber’s nominee can buy an annuity plan from the NPS Annuity Service Providers.

4. NPS withdrawal rules related to the death of government employees
   In the event of the government employee’s premature death, the entire corpus (up to a limit of Rs. 5 lakhs) is paid as a lump sum to the nominee/legal heir. If the accumulated corpus is higher than Rs. 5 lakhs, 80% of the funds need to be used for the purchase of default annuity by the dependents, while 20% is paid as a lump sum. If none of the dependents (spouse, parents) are alive, 20% is paid to the nominee, and 80% is paid to the surviving children or legal heirs of the subscriber.

5. NPS withdrawal rules regarding partial withdrawals
   A total of 3 partial withdrawals are permitted against special reasons like children’s higher education, marriage, and treatment of critical illness throughout the subscriber’s NPS investment tenure. NPS subscribers can qualify for partial withdrawals only after the completion of the first 3 years. Additionally, the partial withdrawal amount cannot exceed 25% of the total contributed sum, and there must be a 5-year gap between each partial withdrawal.

NPS withdrawal limit

NPS has two types of accounts, namely, the mandatory Tier I account and the voluntary Tier II account. NPS withdrawal rules prescribing maximum withdrawal limits vary depending on the NPS account in question. Let’s take a look at the NPS withdrawal limits for the two types of accounts:
 

A. Tier I

NPS withdrawal rules concerning the Tier I account vary depending on when the withdrawal is made, the reason for the withdrawal, and the subscriber category in question. For instance, corporate and government employees withdrawing from NPS at the age of 60 years must direct at least 40% of the corpus towards annuity purchase, while 60% can be withdrawn as a lump sum amount. However, if the investment is withdrawn by corporate and government employees upon voluntary retirement before the age of 60, 80% of it must be used to buy an annuity.
 

B. Tier II

As mentioned earlier, Tier II is a voluntary savings account. There are no limits on NPS withdrawal for Tier II accounts.
 

NPS premature withdrawal rules - Tier I & II

NPS subscribers can prematurely withdraw from the investment after the completion of 5 years. Here is a run-down of the premature withdrawal rules applicable to NPS tier 1 and tier 2 accounts:
 

A. For NPS Tier I accounts:

Accumulated corpus	National Pension Scheme withdrawal rule
If the corpus is less than/equal to Rs. 2.5 lakhs	Lump-sum withdrawal without any taxation.
If the corpus is more than Rs. 2.5 lakhs	You can withdraw up to 20% as a lump sum, and the remaining 80% must be used for annuity purchase.

 

B. For Tier II accounts:

There are no NPS withdrawal rules applicable to Tier II accounts. NPS Tier II accounts work like regular savings bank accounts. Therefore, you can withdraw any sum required (without maximum limits) to meet your cash requirements.

NPS partial withdrawal rules

• Only up to 25% of the subscriber’s contribution can be withdrawn.

• Allowed after 3 years of NPS account opening.

• Withdrawals are permitted for defined purposes only.

• A maximum of 3 partial withdrawals are allowed during the tenure.
   

Time period for NPS withdrawal

When it comes to NPS withdrawal rules, you need to consider the three following periods:

1. Withdrawal upon maturity:
   To withdraw from your NPS Tier I account at maturity, you have to wait until you attain the age of 60 years or superannuation age.

2. Withdrawal upon voluntary exit:
   To withdraw from your NPS Tier I account prematurely before the age of 60 years, you have to remain invested in NPS for at least 5 years. Upon a voluntary exit, you must use 80% of the corpus to purchase an annuity.

3. Partial withdrawal:
   To make partial withdrawals from your NPS Tier 1 account, you must have completed at least 3 years of investment. According to the NPS withdrawal rules, you can make a maximum of 3 partial withdrawals from NPS before maturity. Additionally, there must be a gap of 5 years between each partial withdrawal.

How to apply online and offline for National Pension Scheme withdrawal

A. Online

Step 1: Log into the CRA website using your PRAN and password

Step 2: Click on the ‘Withdrawal’ option under the ‘Transact Online’ tab

Step 3: Select an appropriate withdrawal option from the list (superannuation, premature, or partial) to automatically pick the applicable withdrawal form

Step 4: Confirm your PRAN details to get a system generated NPS withdrawal form

Step 5: Fill-up and submit the form, along with other documents to the Nodal Office
 

B. Offline

NPS withdrawal rules also permit offline request submissions. The offline method involves filling out the relevant withdrawal form and submitting it at the nearest Nodal Office or Point of Presence Service Provider office. You must attach all the necessary supporting documents to the duly filled-out form.

Also read: Difference between NPS vs PPF
 

Conclusion

Understanding NPS withdrawal rules is crucial for investors to make informed financial decisions. Unlike other long-term investment schemes, NPS offers several withdrawal options to subscribers to meet their liquidity requirements. However, NPS withdrawal rules differ based on whether withdrawals are made upon maturity, voluntary exit, or partially before maturity. Withdrawal limits also vary depending on the time period and type of withdrawal request. Understanding this nitty-gritty can help you better manage your NPS investment and easily leverage it when in need of urgent cash flow.