Explained: How to make withdrawals under National Pension System

You can choose to exit NPS completely even prior to turning 60 – which is the age of vesting or maturity – but it comes at a cost.

Creating a retirement kitty over the long term is a crucial element of financial planning, but instances where you need liquidity can always arise along the way.

Like the Employees’ Provident Fund and the Public Provident Fund, the National Pension System (NPS) too does not encourage withdrawals in the interim.

However, keeping in mind situations where dipping into retirement savings is inevitable, these schemes have in-built mechanisms that yield liquidity, while leaving the larger corpus intact.

Watch: Want to withdraw from NPS funds before retirement? Here’s how you can

Here’s how partial, premature and final withdrawal processes work:

Partial withdrawal after three years

Under the NPS, you can open two accounts: Tier-I and Tier-II. The latter is a savings account that is to be opened voluntarily and there are no restrictions on withdrawals. It’s the Tier-I (main, retirement account) withdrawal rules that you need to be aware of. You can make partial withdrawals from this account before retirement, subject to some restrictions.

You can withdraw 25 percent of your own contributions to the account after completing three years. In other words, neither your employer's contributions, if any, nor the returns that your contributions have earned until then, can be withdrawn.

Moreover, you can do so only for specific reasons – treatment of illness, disability, funding of education or marriage of children, property purchases or starting a new venture. You can withdraw a maximum of three times during the entire investment period.

Also read | How to make the best use of NPS investment choices and withdrawal options

Complete, premature withdrawal

You can choose to exit the NPS completely even before turning 60 – which is the age of vesting or maturity – but it comes at a cost.

For one, you cannot make such a withdrawal before completing five years. If you have started investing in NPS after you turned 60 years of age, this period is much shorter at three years.

In the case of premature exits, you can withdraw up to 20 percent of the corpus in the account as a lump-sum and the remaining 80 percent of the corpus has to be mandatorily used to purchase an annuity plan from empanelled life insurance companies.

However, if the total corpus in the account is less than Rs 2.5 lakh, NPS will pay out the entire amount as lump-sum to you.

Also read | Why NPS Tier-II tax saver scheme has failed to gain traction with central government employees 

Final exit at maturity

You can make your regular, final withdrawal once you cross 60 years of age.

You can withdraw up to 60 percent of the corpus as a lump-sum, tax-free. However, you have to compulsorily convert the balance 40 percent into annuities, and this income is taxable at the slab rate applicable to you.

If your accumulated corpus is less than Rs 5 lakh, the entire lump-sum will be handed out to you.

Staggered withdrawal till 75 years of age

This is a relatively newer option introduced by the Pension Fund Regulatory and Development Authority in 2023. It allows you to withdraw the 60 percent lump-sum component in a staggered manner, instead of at one go, through a systematic lump-sum withdrawal (SLW) facility.

This is an automated systematic withdrawal option on the lines of the facility that mutual funds currently offer. Now, every NPS subscriber will have to make this choice at retirement (at the age of 60): lump-sum proceeds or systematic withdrawal.

You can choose to receive the proceeds in monthly, quarterly, half-yearly and annual modes until you turn 75. The regulator is yet to permit systematic withdrawal instead of annuitisation—40 percent of the amount will still have to mandatorily be converted into annuities, that is, pension income.