Understanding NPS Withdrawals

Understanding NPS Withdrawals

The National Pension System (NPS) offers a long-term retirement savings plan in India. However, unlike traditional pension plans, NPS restricts access to your accumulated funds until maturity. This article will explain the different scenarios under which you can withdraw money from your NPS account and the rules governing them.

Partial Withdrawals

For emergencies or specific needs, NPS allows partial withdrawals only under certain conditions:

• Eligibility: You must have been an NPS subscriber for at least three years.
• Amount: You can withdraw a maximum of 25% of your own contributions (excluding employer contributions, if any).
• Frequency: A maximum of three partial withdrawals are allowed throughout your NPS tenure. There must be a gap of five years between withdrawals unless used for specified critical illnesses.
• Reasons: Permissible reasons for partial withdrawal include:

o   Higher education for children

o   Marriage of children

o   Purchase or construction of a house (meeting specific conditions)

o   Treatment of specified critical illnesses

Withdrawals at Maturity (Exit or Retirement)

Upon reaching maturity (usually at 60 years of age or retirement), you have two options for withdrawing your NPS corpus (accumulated funds):

• Full Withdrawal (Corpus Below Rs.2 Lakh): If your total NPS corpus is Rs.2 lakh or less, you can withdraw the entire amount as a lump sum.
• Partial Withdrawal (Corpus Above Rs.2 Lakh): For a corpus exceeding Rs.2 lakh, the rules mandate:
• Annuity Purchase (40%): You must use at least 40% of the corpus to purchase an annuity plan that provides you with a regular monthly income post-retirement.
• Lump Sum Withdrawal (60%): The remaining 60% can be withdrawn as a lump sum. You can also choose to postpone this withdrawal until you turn 70.

Tax Implications: The 60% lump sum amount withdrawn is tax-free. However, the annuity income will be taxed as per your income tax slab in the year it is received.

Voluntary Exit (Before Maturity)

NPS allows subscribers to exit prematurely. However, this comes with stricter limitations:

• Eligibility: You must have been subscribed to NPS for at least 10 years.
• Amount:
• Corpus Below Rs.1 Lakh: You can withdraw the entire amount.
• Corpus Above Rs.1 Lakh:
• Annuity Purchase (80%): A minimum of 80% of the corpus must be used to purchase an annuity.
• Lump Sum Withdrawal (20%): You can withdraw only 20% of the corpus as a lump sum.

Tax Implications: Both the withdrawn amount (20%) and the annuity income will be taxable. The withdrawn amount will be added to your income and taxed according to your income tax slab. The annuity income will also be taxed annually as per your income tax slab.

NPS Withdrawal After Maturity (New Rules)

The NPS rules have been revised to offer more flexibility after maturity:

• Increased Subscription Age: The maximum age to subscribe to NPS is now 70 years (up from 65).
• Extended Exit Limit: The NPS account can now be continued until 75 years of age.
• Deferred Withdrawal/Annuity Purchase: Individuals can postpone withdrawing any amount or purchasing an annuity for up to three years after reaching 60 years of age or retirement (whichever is earlier).

Postponement of Withdrawal: After maturity, if you choose to defer withdrawal, the same rules regarding the minimum mandatory annuity purchase (40% for corpus above Rs.2 lakh) will apply when you finally decide to withdraw.

NPS Withdrawal in Case of Subscriber's Death

In case of an unfortunate event, the nominee or legal heir can withdraw the complete NPS corpus if the subscriber was a private sector employee. However, for government employees, there's a mandatory requirement to purchase an annuity plan using a portion of the corpus.