You can withdraw your NPS investments both prematurely and after maturity with different rules applicable in case of different types of withdrawals. There is also a third option – partial withdrawal from NPS. On this page, we will discuss all three types of NPS withdrawals. There are specific NPS withdrawal limits for each type of exit from the National Pension System. The following are some key facts about the NPS withdrawal process.
NPS Withdrawal Limit for Tier 2 Account
Under existing rules of the National Pension System, there are no restrictions on NPS Tier 2 withdrawal thus the rules of NPS withdrawal and withdrawal limits currently only apply to NPS Tier 1 withdrawals. While this might seem to be a point in favour of investing more in the Tier 2 NPS account as compared to the Tier 1 account, do keep in mind that optional NPS Tier 2 investments do not feature any tax benefits under Section 80C or any of its subsections.
NPS Withdrawal Limit for Tier 1 Account
In contrast to the NPS Tier 2 account, NPS Tier 1 account features a number of rules with respect to withdrawal limits. These withdrawal limits for the NPS are primarily defined by the type of withdrawal being made and also on the amount being withdrawn from the NPS Tier 1 account. The following are the key withdrawal rules in the cases of withdrawal before maturity, partial withdrawal and withdrawal after maturity.
NPS Withdrawal Rules for Premature Withdrawal
The NPS Tier 1 account matures after the subscriber is 60 years old. Withdrawal before maturity for NPS Tier 1 can only be made after completion of three years from the date of opening of the NPS account. This type of NPS withdrawal is termed as “premature exit”. You can only withdraw 20% of your corpus at the time of premature exist. The remaining 80% must be used to buy an annuity. Both the 20% withdrawal and the annuity are taxable.
For example, if you have an NPS corpus of Rs 10 lakh and you withdraw at the age of 40. This will be termed as premature exit. You will be allowed to withdraw only Rs 2 lakh and the same will be added to your income and taxed as per your slab rate. The remaining Rs 8 lakh must be used to buy an annuity (monthly pension). The Rs 8 lakh purchase price is not taxable in the year of annuity purchase. However the annuity will be taxed, as and when it is paid. For example, if you are able to purchase an annuity of Rs 60,000 per year from your Rs 8 lakh NPS corpus, the same will be taxable each year separately. For example, Rs 60,000 will be taxable in the first year of annuity and the next Rs 60,000 in the second year of annuity and so on.
NPS Withdawal Rules for Partial Withdrawal
You can make partial withdrawals from the NPS corpus for specified purposes. Under existing NPS withdrawal rules, the maximum amount that you can withdraw is up to 25% of your total contribution (not calculated on the total NPS account balance). However, to avail the NPS partial withdrawal benefit you need to be have been a NPS account subscriber for at least 10 years at the time of withdrawal. Partial withdrawals can only be made up to three times during the entire tenure of your NPS account. Under existing rules of the national pension system, these partial withdrawals are completely tax-free.
Partial NPS contribution withdrawals can be requested for the following:
- Higher education of children
- Marriage of children
- For the purchase or construction of a residential house or flat either in your own name or jointly with your spouse. However if you already own or jointly own a house or flat other than ancestral property, this will not be permitted.
- For the treatment of any of the illnesses mentioned below. The patient can be the subscriber, his spouse, children or dependent parents.
- Kidney Failure
- Preliminary Pulmonary Arterial Hypertension
- Multiple Sclerosis
- Major Organ Transplant
- Coronary Artery Bypass Graft
- Aorta Graft Surgery
- Heart Valve Surgery
- Myocardial Infarction
- Total Blindness
- Accident of serious/life-threatening nature
- Any other critical illness of a life-threatening nature specified by the PFRDA from time to time
NPS Tier 1 Withdrawal Rules for Withdrawal after Maturity
The NPS Tier 1 account matures after the subscriber attains the age of 60 years, although you can delay withdrawal of these investments till the age of 70. Under existing NPS withdrawal rules for withdrawal after maturity, you can withdraw up to 60% of your corpus tax free. You are mandatorily required to use the remaining 40% of your corpus to buy an annuity. The annuity provides monthly pension to the NPS subscriber after retirement. The monthly pension received is taxable at the slab rate of the investor. However this taxation will not occur at the time of NPS withdrawal but as per the slab rate in the financial year during which the pension payouts actually occur.
For example, assume that you have an NPS corpus of Rs 1 crore.
- Out of this, you lump sum withdrawal of up to Rs 60 lakh is tax-free.
- You use the remaining Rs 40 lakh to buy an annuity (a monthly pension) from one of the companies empanelled by the PFRDA. This annuity amount is not taxable at the time of annuity purchase. However the annuity itself is taxable at your slab rate as and when the disbursal occurs. For example, assume that you get an annuity of Rs 3.2 lakh per year until your death from the Rs 40 lakh purchase price. This annual payment of Rs 3.2 lakh will be taxable at your slab rate. This payment will be taxable in the respective years of payment and not in the year of annuity purchase.
Online NPS Withdrawal Process
In case you are exiting NPS via the online route, you need to log into your NPS account using your PRAN and password to initiate an exit request. While there are some restrictions with respect to withdrawing from the tier 1 account, there are no restrictions on NPS Tier 2 withdrawals – you can initiate a withdrawal request on any business day.
NPS Forms for Offline Withdrawal
There are three different NPS forms for completing the NPS withdrawal process offline. These separate forms are designed to process an exit from NPS subscription in the following cases:
- Partial withdrawal of NPS contribution. Download form for NPS partial withdrawal
- Exit from NPS subscription before maturity. Download form for premature exit from NPS
- Withdrawal after superannuation (maturity) or incapacitation of subscriber. Download form for NPS exit after superannution/incapacitation
A separate NPS withdrawal form is also available in case death of government employee subscriber of the scheme. This is because the government employee NPS is different from the all citizen’s NPS plan. Download the form for NPS exit in case of death of government employee
You can download and fill out the applicable NPS form and submit it at a NPS PoP (Point of Presence) along with supporting documents (as applicable) to start the NPS exit procedure. Get the complete list of NPS PoPs
Key details you need to mention in the withdrawal form include:
- Subscriber name
- Subscriber date of birth
- PRAN number
- PAN number
- Nominee details etc.
Since NPS withdrawals are credited directly to your account, you need to mention your bank account number, IFSC code, bank name and branch address.Other details that are included in the National Pension System offline withdrawal form include much of the corpus you want to use to buy an annuity, the annuity provider (to be selected from list of companies empanelled by the PFRDA) and the type of annuity you want. Types of annuity currently available at the time of withdrawal from this pension scheme include:
- Pension/annuity payable at uniform rate for life
- Annuity payments for 5,10, 15 or 20 years with certainty thereafter till death of subscriber
- Annuity for life with return of purchase price on the member’s death
- Annuity with increasing payout rate at 3% per annum
- Annuity for life with provision for 50% payout of annuity payable to spouse on annuitant’s death
- Annuity for life with provision for 100% payout of annuity payable to spouse on annuitant’s death
- Annuity purchase price refunded on death of last survivor with payout equal to 100% of payable annuity to spouse on death of the annuitant.
NPS Taxation Rules
Unlike some other section 80C tax saving investments, NPS withdrawals are taxable in most cases. The taxation rules of NPS withdrawal differ depending on the type of withdrawal/exit from NPS. The only case of zero tax on NPS withdrawal is applicable to partial withdrawal of the NPS contribution. This is allowed only due to specified reasons and after at least 10 years of subscription. Limitations include the fact that only 25% of the subscriber’s total contribution (not the value of the NPS corpus) can be withdrawn as a lump sum and such partial withdrawals can be made only 3 times during the lifetime of the NPS account.
In case of withdrawal due to superannuation (maturity) of account, the current NPS taxation rules stipulate that 60% of the amount can be withdrawn without payment of any tax. The remaining 40% of the NPS withdrawal has to be mandatorily used to purchase annuities. However, annuity pay outs are taxable in the financial year of pay out according to the slab rate of the individual investor.
In case of premature exit of a subscriber from NPS, the lump sum withdrawal (20%) is taxable as per the applicable slab rate in the year of withdrawal. The remaining 80% of the corpus has to be mandatorily converted into annuities and is taxable as per the slab rate of the annuitant in the year of pay out.