NPS Withdrawal: NPS Partial Withdrawal Conditions, Limitations & Taxation

What is Partial Withdrawal in NPS?

An NPS member can make partial withdrawals from their retirement funds to meet specific needs without affecting their monthly retirement stipend. According to Pension Fund Regulatory and Development Authority (PFRDA) regulations, subscribers can withdraw up to 25% of their individual contributions, excluding returns and employer contributions.

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What are the Partial NPS Withdrawal Rules?

Subscribers can make partial withdrawals from their NPS account under the following conditions:

• Withdrawals are limited to three times during the subscription period.
• Each withdrawal can be up to 25% of the subscriber's contributions.
• The subscriber must have been a member of the scheme for at least three years to be eligible.
• Withdrawals are permitted only for specific purposes, such as children's education, marriage expenses, house construction, or medical emergencies.

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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 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 or marriage of children.
• Purchase or construction of a residential house or flat (individually or jointly with a spouse).
• Treatment of specified illnesses for the subscriber, spouse, or children.
• Medical and incidental expenses due to disability or incapacitation of the subscriber.
• Starting a new venture or startup.
• Expenses for skill development, reskilling, or self-development.
• A maximum of three withdrawals are allowed during the entire tenure, from the date of joining until the age of 60.
• The subscriber must have completed at least three years in the National Pension System.
• Withdrawals are limited to 25% of the subscriber's contributions. Employer contributions are not included in this limit.

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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.

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Taxability of Partial NPS Withdrawals

Given below is the taxability of partial withdrawals -

Tier I Account:

• Up to ₹1 lakh: You can withdraw the entire amount as a lump sum without any tax liability.
• Above ₹1 lakh: You can withdraw up to 20% of the total amount, which is taxable. The remaining 80% must be invested in annuities.

Tier II Account:

• Withdrawals are unlimited, making the Tier-II account function like a savings bank account.
• However, the withdrawal process can be cumbersome due to the limited number of Points of Presence (PoPs) for submitting requests and the absence of an online portal, which may lead to delays.

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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.

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NPS Exceptions for 5-Year Gap Rule

The 5-year gap rule is not applicable in the case of critical illnesses. These 13 critical illnesses, life-threatening ailments, and accidents are accepted -

• Stroke
• Multiple Sclerosis
• Cancer
• Kidney Failure (End-Stage Renal Failure)
• Heart Valve Surgery
• Primary Pulmonary Arterial Hypertension
• Aorta Graft Surgery
• Major Organ Transplant
• Coronary Artery Bypass Graft
• Paralysis
• Coma
• Total Blindness
• Myocardial Infarction
• Serious or life-threatening accidents
• Any other critical illness deemed life-threatening as per guidelines issued by the authority.

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Documents Required for NPS Withdrawal

Documents Required for NPS Withdrawal
To process an NPS withdrawal, you must provide the following documents:

• Identity Proof: Valid ID such as an Aadhaar card, PAN card, or passport.
• Address Proof: Documents like an electricity bill or ration card.
• Original PAN Card.
• Bank Details:
  • Bank’s letterhead, passbook, or canceled cheque.
  • Bank certificate with the account holder's name, account number, and IFSC code.
• Additional Forms (if eligible for complete withdrawal):
  • Undertaking and withdrawal request form.
  • Advance stamped receipt, duly filled and signed, with the required revenue stamp affixed.

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NPS Taxation Rules

The tax implications of NPS withdrawals vary based on the type of withdrawal:

1. Partial Withdrawal

• No tax is levied on partial withdrawals of NPS contributions.
• Tax exemption applies only if the withdrawal is made after at least 10 years of subscription.
• A maximum of 25% of the total contribution can be withdrawn as a lump sum.
• Withdrawals are allowed up to three times during the lifetime of the NPS account.

2. Premature Exit

• Lump sum withdrawals of up to 20% of the total corpus are taxable.
• Mandatory conversion of 80% of the corpus into an annuity, with annuity payouts taxed as per the subscriber’s income tax slab in the year of receipt.

3. Superannuation (Maturity)

• No tax is levied on 60% of the total NPS corpus withdrawn upon superannuation.
• The remaining 40% must be used to purchase annuities, with annuity payouts taxed as per the applicable tax slab.

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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!

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