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NPS Withdrawal: NPS Partial Withdrawal Conditions, Limitations & Taxation

Updated on: 04 Jun, 2024 02:52 PM

An individual can withdraw NPS investments either prematurely or post maturity as per the NPS withdrawal rules. both the options are available to choose from. However, there is also a third option available, i.e. of partial withdrawal. The NPS scheme is regulated by the PFRDA (Pension Fund Regulatory and Development Authority). For all the individuals who had invested in NPS, Budget 2017 was a game changer. The reason for this in this particular budget, it was declared that partial withdrawals from the NPS accounts would be tax-free. Prior to this, partial withdrawals made were taxable.

What are the Partial NPS Withdrawal Rules?

As per PFRDA, individuals can also withdraw their NPS account balance partially, subject to certain rules and regulations. There are mainly two types of NPS accounts Tier I and Tier II. If you want to subscribe to NPS, you must mandatorily open a Tier-I account. Whereas Tier II is an add-on voluntary savings account to a Tier I account holder having flexible rules. While withdrawals from Tier I accounts are allowed only under certain specified conditions, partial withdrawals from Tier II accounts are not subject to any restrictions. However, a government employee contributing to a Tier II account and claiming a deduction upto Rs.1,50,000 under section 80C cannot withdraw any amount before the completion of the 3-year lock-in period.

NPS Tier 1 Partial Withdrawal Rules

NPS subscribers can make partial withdrawals from their Tier I account under specific circumstances, such as for treating critical illnesses, funding higher education, or covering children's marriage expenses. To qualify, subscribers must have been invested in the NPS for at least three years. They can withdraw up to 25% of their contributions. Throughout the investment period, subscribers can make partial withdrawals up to three times, with at least a five-year gap between each withdrawal. These withdrawals are tax-free.

For example, if Ms. X starts contributing to an NPS Tier I account at age 38, and by age 43 has contributed Rs. 3,00,000, she can apply for a partial withdrawal. She can withdraw up to Rs. 75,000 for specific needs like treating a critical illness, building a home, or marrying off her children. The remaining corpus must be used to purchase annuities for her monthly pension after retirement. If the subscriber dies before retirement, the entire corpus is paid to the nominee or legal heir without any tax deductions.

Partial Withdrawals under Tier I accounts are allowed only under the following conditions -

  • Higher education of children
  • Marriage of children
  • Purchase or construction of a residential house or flat in their name or jointly with their spouse
  • Treatment of specified illnesses for the subscriber, spouse, or children
  • Covering medical and incidental expenses due to disability or incapacitation
  • Setting up a new venture or start-up
  • Meeting expenses for skill development, reskilling, or self-development activities

NPS Tier II Partial Withdrawal Rules

Since Tier II accounts are voluntary, there are no restrictions on withdrawals. Investors can withdraw any amount from their Tier II accounts for any purpose, similar to a savings bank account. However, Tier II accounts do not offer the tax benefits that Tier I accounts do.

For example, if Ms. X has contributed Rs. 3,00,000 to her Tier II account, she can withdraw the entire amount without any limits. However, this withdrawal will be subject to taxation.

Taxability of Partial NPS Withdrawals

Given below is the taxability of partial withdrawals -

Tier I Account:

  • Contributions to a Tier I account are eligible for tax deductions.
  • Partial withdrawals from the Tier I account are allowed under certain conditions, and 25% of the permissible withdrawal is tax-free.

Tier II Account:

  • Government employees can claim a deduction under Section 80C for contributions made to their Tier II NPS account after a 3-year lock-in period.
  • This benefit is not available to non-government employees.

What is the Maximum Amount that Can be Withdrawn?

There is a maximum limit set for the amount that can be partially withdrawn from the Tier-I account of NPS, but no such limit has been set for Tier-II accounts. An individual can only withdraw upto 25 percent of his own contributions. It needs to be noted that if both the individual and his employer are making the contribution in NPS then the calculation of the employee’s contribution alone will be considered and not the employer.

What is the Limit Set on the Number of Withdrawals?

According to the NPS rules, partial withdrawals are allowed only 3 times during the entire tenure of the NPS, i.e from the date of joining till the age the individual reaches 60 years of age.

How to Apply for NPS Withdrawal - Online and Offline?

NPS Tier 1 Withdrawal

Online Process:

  1. Sign in to the CRA website using your PRAN number and password.
  2. Navigate to the "Transact Online" tab and select the "Withdrawal" option.
  3. Choose the type of withdrawal: superannuation, partial, or premature.
  4. Confirm your PRAN details to generate the NPS withdrawal form.
  5. Print the filled form and attach supporting documents (KYC details, PAN number, nominee details, etc.).
  6. Submit these documents to the nodal office.

Offline Process:

  1. Fill in the relevant withdrawal form.
  2. Attach supporting documents.
  3. Submit the form and documents at the nearest Point of Presence Service Provider (PoP/PoP-SP).

NPS Tier 2 Withdrawal

Online Process:

  1. Raise a withdrawal request on the CRA-NSDL website.

Offline Process:

  1. Fill out the UOS-S12 form.
  2. Attach supporting documents.
  3. Submit the form and documents at the nodal office or PoP.
  4. The request will be processed, and the amount will be disbursed within 3 days.

If you have made a partial withdrawal from your NPS account, you might be eligible for tax deductions subject to certain conditions. In addition to this, there are various other potential tax deductions that you might be eligible to claim. However, understanding everything about them can be complicated. Therefore, it is advisable to consult a tax expert while filing your ITR. Hire an online CA Now!

Frequently Asked Questions

Q- How can an individual get a claim ID for NPS withdrawal?

Six months before the date of retirement, a claim ID will be generated by the CRA. Post generation of the Claim ID, individual/nodal office will be able to initiate the online withdrawal request in the CRA system. This happens in case of superannuation i.e., at the age of 60 years.

Q- If Premiums are pending, can I still make a partial withdrawal?

Partial withdrawals are only possible if all the premiums are paid on time and the policy is in force.

Q- How many times can a subscriber withdraw from an NPS account?

A subscriber can withdraw a maximum of 3 times in their entire tenure from the date of joining till 60 years of age.

Q- What are the conditions for partial withdrawal from a Tier 1 account?

  • Partial withdrawal from NPS Tier 1 is allowed only after a minimum of 3 years of subscription.
  • The maximum NPS partial withdrawal permitted is 25% of the contributed corpus.
  • Partial withdrawal is only allowed for specific reasons outlined by the PFRDA.
  • Some of these reasons include higher education of children, marriage of children, and treatment of critical illnesses, among others.
  • A maximum of 3 partial withdrawals is allowed throughout the tenure of subscription.

Q- Can I request for NPS withdrawal online?

Yes, you can do so by logging into the CRA-NSDL website using your PRAN details. Select the withdrawal method that you want to opt for and apply for NPS withdrawal. These requests are first verified by the nodal officer.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.