Are you considering making early withdrawals from your National Pension System (NPS), but feeling unsure about the rules and implications? Many individuals contemplate this option as they navigate their financial journey. Whether it’s for unexpected expenses or to meet any other financial goals, understanding the ins and outs of withdrawing from NPS before retirement is crucial. In this blog we will delve into the intricacies of NPS withdrawal rules, covering partial withdrawals from Tier I and Tier II accounts, conditions for such withdrawals, and premature exit options.
NPS Partial Withdrawal Rules
NPS offers two accounts – Tier I and Tier II. Tier I is primarily for building your retirement corpus. It comes with less flexibility and has specific rules for partial withdrawals. To be eligible for a partial withdrawal from Tier I, you must have been invested in NPS for at least three years.
You can withdraw a maximum of 25% of the principal contribution, but employer contributions cannot be withdrawn. Moreover, you can make a partial withdrawal a maximum of three times during the entire investment tenure, with at least a five-year gap between each withdrawal. On the other hand, Tier II accounts are voluntary and come with no restrictions on withdrawals, offering you more flexibility in accessing your funds.
Conditions of Partial Withdrawal
Partial withdrawals from Tier I are permitted for various purposes, including children’s higher education, marriage, purchase or construction of residential accommodation, treatment of critical illnesses, disability-related expenses, skill development, and starting a venture as per PFRDA guidelines. These withdrawals are tax-free, providing you with the necessary financial support during specific life events without worrying about additional tax burdens.
As per PFRDA, the following is the list of conditions for partial withdrawal
- Children’s higher education
- Children’s marriage
- Purchase or construction of residential accommodation. This can be in the investor’s name or jointly with the spouse. However, this is not applicable if the investor already owns a house.
- Treatment of critical illnesses for the investor, their spouse, children, or dependent parents. Examples of some critical illnesses are Cancer, Kidney failure, Organ transplants, Heart surgeries like coronary artery bypass, graft surgery, heart valve surgery, etc., Stroke, Coma, Paralysis, and Serious accidents.
- To cover medical and incidental expenses if you’re disabled or incapacitated.
- For the expense incurred on skill development. Re-skilling or any other self-development activities, following PFRDA guidelines.
- To start any venture or start-up permitted by PFRDA guidelines.
NPS Premature Exit
Planning to exit NPS before reaching the age of 60? NPS also allows for premature exits, but the conditions differ for government and non-government sector subscribers.
In the government sector, premature exit is applicable in cases like resignation, voluntary closure, dismissal, or premature removal by the employer. If your corpus is equal to or less than ₹2.50 lakh, you can withdraw the entire amount as a lump sum. However, if it exceeds ₹2.50 lakh, at least 80% of the corpus must be utilized to purchase an annuity while the rest can be withdrawn as a lump sum. Non-government sector subscribers can opt for premature exit after five years of registration. They have the same withdrawal conditions as Government subscribers.
1. What are the rules pertaining to partial withdrawal from NPS tier 1
Ans. You can partially withdraw money from NPS tier 1. There are some rules that must be satisfied. For example, your NPS investment tenure must have completed at least three years for you to be eligible to withdraw from tier 1. Furthermore, you can only withdraw 25% of the principal contribution. Above, there are some specific needs and cases for which you can withdraw money. The list of needs and cases are already explained above.
2. How many times can a subscriber withdraw money from NPS?
Ans. A subscriber can withdraw money from NPS only three times during the entire tenure.
3. Do I need to pay tax when I withdraw from NPS tier 2?
Ans. Yes, withdrawing money from NPS tier 2 attracts capital gains tax. If you withdraw within a year you will need to pay short term capital gains tax, while if you withdraw after a year, you will need to pay long term capital gains tax.
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~ Nischay Avichal
