Launched by the Government of India in 2004, the National Pension System or NPS is a defined contribution pension scheme. It was started after the government’s decision to stop defined-benefit pensions.

NPS is governed by the Pension Fund Regulatory and Development Authority (PFRDA). It is available to every individual between the ages of 18 and 65 years.

Currently, there are 8 pension fund managers –

  • LIC Pension Fund Ltd.
  • SBI Pension Funds Pvt. Ltd.
  • UTI Retirement Solutions Ltd.
  • Reliance Capital Pension Fund Ltd.
  • HDFC Pension Management Co. Ltd.
  • ICICI Prudential Pension Fund Management Co. Ltd.
  • Kotak Mahindra Pension Fund Ltd.
  • Birla Sunlife Pension Management Ltd.

Nonetheless, there are several restrictions and conditions to NPS withdrawal rules that account holders should know of.

NPS Withdrawal Rules

These rules are mentioned below –

  • In case of partial NPS withdrawal 

Partial withdrawal from NPS is only available for the treatment of specified illnesses, purchase or construction of a house, children’s wedding, and children’s higher education.

Rules for partial withdrawal are –

  • Subscribers have to hold an NPS account for a minimum of 3 years to be eligible for partial withdrawal.
  • This amount that can be withdrawn is restricted to 25% of an account holder’s contribution.

For example, if a subscriber’s contribution amounts to Rs.5 Lakh at the time of withdrawal, then he/she will be eligible to withdraw Rs.1.25 Lakh. 

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  • Subscribers can partially withdraw only 3 times during the entire lock-in period. There should be a minimum gap of 5 years between each withdrawal.
  • In case of retirement

NPS withdrawal rules in case of retirement are detailed below –

  • If the accumulated corpus in one’s NPS account is equal to or less than Rs.2 Lakh, then he/she can withdraw their entire fund.
  • If one’s accumulated corpus is more than Rs.2 Lakh, then 40% of this fund will go towards purchasing an annuity plan.
  • The balance can be withdrawn in a lump sum and can also be postponed till one reaches 70 years of age.

Example – 

Mr. A has retired and plans to withdraw from his NPS account. The accumulated corpus in his account is Rs.25 Lakh. According to requisite NPS withdrawal rules, he will be able to withdraw Rs.15 Lakh (60% of Rs.25 Lakh). The remaining Rs.10 Lakh will be used to purchase an annuity.

It should be noted here that the fund that can be withdrawn (60% of the total corpus) will be exempt from taxation. However, the annuity, when received, will be taxable every year as per the income tax slab the subscriber belongs to.

  • In case of voluntary exit 

National Pension System subscribers can voluntarily exit this scheme before the completion of its tenure. The rules in such cases are –

  • Subscribers have to hold an account for a minimum of 10 years to be eligible for the voluntary exit.
  • If the accumulated corpus is less than Rs.1 Lakh, an account holder can withdraw the entire amount.
  • If the accumulated fund is more than Rs.1 Lakh, 80% of this amount will go towards the purchase of an annuity plan.

Example –

Mr. B plans to prematurely exit from NPS at the age of 40. He has Rs.15 Lakh in his account. Now, as per the NPS withdrawal rules, he will be able to withdraw only Rs.3 Lakh (20% of Rs.15 Lakh). The remaining Rs.12 Lakh will be used to purchase an annuity.

It should be noted here that both the withdrawn amount and the annuity will be taxable. The corpus withdrawn will be added to the subscriber’s income and taxed as per the income tax slab he/she belongs to.

On the other hand, the annuity will be taxable when it is paid. The amount used to purchase the annuity, from the 80%, will be taxed each year as per the subscriber’s income tax slab.

What is the Process for Withdrawal from NPS?

The process to withdraw from an NPS account is different for Tier 1 and Tier 2 accounts. The details for the same are mentioned below –

  • NPS Tier 1 withdrawal

Online method – 

The steps for NPS withdrawal online from a Tier 1 account is mentioned below –

  1. Visit the official website of NSDL-CRA.
  2. Enter your user ID (PRAN) and password to log in.
  3. Under the “Transact Online” tab, select “Withdrawal”.
  4. Select “Partial withdrawal from Tier-I” from the available options.
  5. Confirm your PRAN and click “Submit”.
  6. Enter the percentage of funds to be withdrawn along with the reason for withdrawal.
  7. Click “Submit”.

A form will be generated which subscribers have to submit to the nodal office along with the following documents –

  • Original PRAN card.
  • KYC documents.
  • Advance stamp receipt filled and cross-signed on the revenue stamp by the account holder.
  • Bank letterhead, bank passbook, bank certificate, or a canceled cheque that contains the account holder’s name, bank account number, and bank IFSC code.
  • Request cum undertaking form if the subscriber is eligible to withdraw the complete corpus.

Offline method –

Subscribers have to download relevant forms for withdrawal (partial withdrawal, exit, or retirement), fill it with relevant details, and attach it with the supporting documents mentioned above. They have to submit these forms at the nearest Point of Presence Service Provider (PoP/PoP- SP).

  • NPS Tier 2 withdrawal

Tier 2 withdrawal can be only carried out offline through a PoP-SP. To do the same subscribers have to fill a UOS-S12 form and attach it with the supporting documents. The PoP will initiate the withdrawal request and disburse the amount within 3 days.

What are the Tax Implications on NPS?

Income tax benefits on the National Payment System is available under the following sections –

Section Exemptions Ceiling
Section 80CCD (1) Rs.1.5 Lakh –

Available under the overall tax exemptions offered under Section 80C.

Section 80CCD (2) 10% of salary (basic + DA) contributed by the employer –

Over and above Section 80CCD (1).

Section 80CCD (1b) Rs. 50,000 –

Over and above Section 80CCD (1) and Section 80CCD (2).

Thus, before initiating the withdrawal, individuals should ascertain whether their NPS plan is a Tier I or Tier II one, to follow the correct procedure.

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