October 2, 2023

NPS Withdrawal Rules You Should Check Out

The National Pension System allows its subscribers to withdraw funds only after they meet certain conditions. NPS holders are also permitted to initiate partial withdrawals in the event of any financial emergency. Notably, the extent of withdrawal tends to depend on the amount of corpus held in your NPS account. The withdrawal limit is also dependent on the account holders’s age, and other key variables. 

Individuals are able to withdraw funds partially from their accounts without attracting any tax liability by submitting a form to the NPS provider.

However, partial withdrawals are allowed only if the NPS holder has held the account for at least 3 years. Additionally, at any time the amount one plans to withdraw from the NPS account should not exceed 25% of the total investment.

That said, an individual can withdraw NPS funds only under these situations:

  • To invest in children’s higher education
  • For funding children’s marriage 
  • Buying a flat/house either in their name or sharing the same with their spouse

(In case the individual already has a house under their name then they won’t be able to withdraw funds)

  • Serious medical conditions such as kidney failure, cancer, MS, and organ transplant

Investors may request to withdraw  60% of their NPS investment as a lump sum. However, the rest of the 40%, will go toward an annuity plan. According to the latest National Pension Scheme guidelines, subscribers can withdraw the entire corpus only if it is less than or equal to Rs. 5 lakhs without an annuity plan. Notably, such withdrawals are tax-free, which aids in the preservation of the NPS corpus.

For example,

Suppose Kashif had invested Rs. 4 lakhs, so as per the NPS withdrawal rules he will be allowed the withdraw the entire sum after he retires.

Conversely, Sumedh had invested Rs. 12 lakhs in NPS, so following the same rules, he can withdraw only Rs. 7.2 lahks without any tax liability. However, he must also purchase an annuity plan with the remaining Rs. 4.8 lakhs.

Notably, only the withdrawals are devoid of tax liability. However, individuals’ annuity plans are liable for taxation as per their income slab.

Required List of Documents for NPS Withdrawal

To withdraw from the NPS account, subscribers need to submit the following documents:

  • KYC
  • PAN card
  • Advance stamped receipt 
  • Revenue stamp 
  • Bank passbook
  • Cancelled cheque
  • Bank’s letterhead
  • Bank certificate 
  • Bank details

NPS Withdrawal Rules for Voluntary Retirement

If a person wants to opt for voluntary retirement before reaching his or her retirement age, he or she can drop out of the NPS before the tenure ends. However, to initiate the same they need to follow a few rules: 

  • Subscribers must have held an NPS account for a minimum of 10 years to be deemed eligible for NPS withdrawals before retirement.
  • According to the revised NPS early withdrawal rules, if the total corpus is less than or equal to Rs. 2.5 lakhs, NPS holders can withdraw the entire amount.
  • However, if the corpus exceeds Rs. 2.5 lakhs, NPS holders can withdraw only 20% of the fund and use the 80% to buy an annuity plan.

 

NPS Withdrawal Rules: Post Maturity

The maximum age to enroll in a National Pension System has been raised from 65 to 70, and the maximum age to exit the scheme has been raised to 75. This means, existing NPS subscribers can continue to invest in the scheme post-60 and access their account till they turn 70. 

The scope to remain invested for a longer time helps accumulate a larger corpus. 

Post maturity, subscribers may choose to delay the purchase of annuity plans or withdrawals for another 3 years after they turn 60 or retire (whichever occurs first.)

An NPS account holder can withdraw a maximum of 60% of their corpus, and 40% of the same will be used to buy an annuity plan.

For example, if Nitin has a corpus of Rs. 10 lakhs he can withdraw only a maximum of Rs. 6 lakhs without any tax liability. However, the remainder, i.e., Rs. 4 lakhs will be set aside to purchase an annuity plan. Nitin will also be taxed on his monthly pension whereas, his annuity plan will be taxed as per his annual tax slab.

NPS Withdrawal for Tier I and II 

NPS account holders have the option to initiate a partial withdrawal in these situations:

  • For Tier I Subscribers

  • To seek treatment for severe health conditions
  • To plan children’s higher education
  • For planning their child’s marriage

Notably, NPS subscribers are allowed to apply for partial withdrawals only thrice during the active tenure of the scheme. Such withdrawals do not accompany any cost and can only be initiated after the subscriber has held the account for a minimum of 3 years.

  • For Tier II Subscribers

Subscribers are allowed to initiate NPS withdrawals through POP-SP. Subscribers have to fill out the UOS-S12 form and attach the required documents to begin the process, following which the funds will be disbursed in 3 days.

There are no restrictions on withdrawals due to the voluntary nature of NPS tier II accounts. However, the withdrawals are not entitled to any tax benefits.

NPS Withdrawal Rules in the Event of Subscriber’s Death

The following norms have to be followed in the event of the death of the NPS account holder:

  • Private sector employees

Following the death of the NPS subscriber, their legal nominee/heir can withdraw the accumulated corpus.

  • Government employees

The heir or nominee of the deceased NPS subscriber will have the option to opt for a pension or withdraw the accumulated in such an event.

Keeping these NPS withdrawal rules in mind will help individuals to access their NPS funds as and when required without many hassles. However, it is recommended to dip into NPS funds prematurely only when there is no other avenue to meet requirements. This is because NPS is typically designed to help one lead a comfortable life post-retirement, dipping into the savings prematurely will only erode the corpus and affect future goals.

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