The National Pension System (NPS) is a government-backed retirement savings scheme that encourages long-term financial security. However, circumstances may arise where individuals need access to their funds before the standard retirement age of 60. While NPS is designed for retirement savings, it offers flexibility for early withdrawals under certain conditions.
Whether you’re considering a partial withdrawal for personal needs, or a premature exit before reaching 60, it’s essential to understand the rules that govern these options. In this blog, we’ll explore the NPS exit rules for withdrawing funds early and how they apply in different situations.
1. Partial withdrawal
Partial withdrawal from the NPS account is allowed after completing 3 years of contribution. These withdrawals are limited to 25% of your own contributions, excluding employer contributions, and are allowed only for specific purposes. These include:
- Higher education: For yourself or your children
- Marriage: For yourself or your children
- Purchasing a house: If you don’t already own one
- Medical treatment: For serious illnesses such as cancer, kidney failure, or heart conditions for yourself, your spouse, or your children
You are allowed to make a maximum of three partial withdrawals during your entire NPS tenure, with at least 5 years between each withdrawal.
2. Premature exit from NPS
- If you wish to exit the NPS before the age of 60, you can do so after completing 10 years in the system. However, there are certain rules to follow for a premature exit:
- 80% of the corpus must be used to purchase an annuity, which will provide you with a monthly pension.
- 20% of the corpus can be withdrawn as a lump sum.
- This ensures that even with an early exit, a substantial portion of your savings is used for its primary purpose—providing financial security in the form of a pension during retirement.
In the unfortunate event of the subscriber’s death before reaching 60, the nominee or legal heir can withdraw the entire accumulated corpus as a lump sum. There is no requirement to purchase an annuity in this case, allowing the family to receive the total savings.
4. Exit for Tier 1 And Tier 2 accounts
It’s important to understand the difference between Tier 1 and Tier 2 accounts when it comes to withdrawals:
- Tier 1 account: This is the primary retirement savings account, and the rules for partial withdrawals and premature exits apply to this account.
- Tier 2 account: A Tier 2 account offers greater flexibility as it functions like a savings account. You can withdraw funds from this account at any time without any restrictions. However, this account doesn’t offer the same tax benefits as the Tier 1 account.
While withdrawals from the NPS are allowed under the rules mentioned above, it's important to note that they come with certain tax implications:
Partial withdrawals up to 25% are tax-free.
Premature exit withdrawals: The 20% lump sum withdrawal is taxable, while the pension you receive from the annuity will be taxed based on your income slab at the time.
The NPS is primarily designed to provide financial security during retirement, but it offers flexibility for early withdrawal in certain situations. Partial withdrawals and premature exits allow you to access funds before 60, but it’s important to remember the tax implications and the requirement to use most of your savings for an annuity. By understanding the NPS exit rules, you can make informed decisions about your retirement savings while ensuring you stay prepared for unforeseen circumstances.
Always consult your financial advisor or NPS service provider to make the best use of the withdrawal options and secure your financial future.
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