The National Pension System (NPS) allows individuals to create a large retirement corpus over the long term in a disciplined manner, at the lowest fund management costs. It offers them the opportunity to invest in equities through tightly-regulated pension funds.
Per NPS tier-I norms, one can only exit the scheme after turning 60 (the age at vesting, in pension parlance). Since the objective is to save for retirement, the rules do not make regular withdrawal of funds easy.
However, subscribers have the option of making part-withdrawals during the tenure of the scheme for critical requirements.
Here’s the lowdown on partial, premature, and final withdrawal regulations:
Partial withdrawals
NPS allows subscribers to make partial withdrawals for specific purposes after a three-year lock-in.
- You are allowed to withdraw 25 percent of only your own contributions — excluding returns earned — after completing three years.
- Your employer’s contributions to your NPS account (which lets you avail of tax deductions of up to 10-14 percent of your basic salary) will not be considered for calculating the partial withdrawal limit.
- You can make a maximum of three such withdrawals during the entire investment period.
- There are restrictions on the purposes for which the money can be withdrawn. For example, one can make a partial withdrawal for house purchase, expenses for treatment of critical illnesses, disability, education, marriage of children, or starting a new venture.
Also read: NPS Vatsalya: How to invest in this scheme? Understand the features, benefits, eligibility and more
Premature exit
While the NPS account is meant to be held till the age of 60, you can exit earlier, but at a cost.
- For one, you can exit only after completing five years in the scheme. However, if you have opened the account after the age of 60, you can exit after three years.
- You can withdraw only up to 20 percent of the corpus as a lump sum.
- The balance 80 percent has to be mandatorily used to purchase an annuity plan from any of the empanelled life insurance companies. This amount will be used to pay you pension for life.
- However, if the total corpus in the account is less than Rs 2.5 lakh, NPS will pay out the entire amount as a lump sum.
Also read: Explained: How to make withdrawals under National Pension System
Upon the subscriber's death before maturity
The entire accumulated NPS corpus will be paid out to the nominees, though they can opt for annuities if they wish to.
Final payout at maturity
Once you turn 60, you can make a complete withdrawal and exit the scheme. However, this does not mean you will get instant access to the entire corpus.
- You can withdraw up to 60 percent of the corpus as a lump sum, and have to compulsorily use the balance 40 percent to buy annuities, which will generate pension income throughout your lifetime.
- While the lump sum component is tax-free, annuity income will be taxed per your slab rate.
- However, if your accumulated corpus is less than Rs 5 lakh, the entire amount will be paid to you in one go.
Introduced by the Pension Fund Regulatory and Development Authority in 2023, this option allows you to access the 60 percent lump sum component in a staggered manner instead of in one go, through a systematic lump sum withdrawal (SLW) plan.
- This is an automated systematic withdrawal facility along the lines of what mutual funds offer.
- NPS subscribers can opt for this at the age of 60. You can choose to receive the proceeds monthly, quarterly, half-yearly, or annually until you turn 75.
- The regulator is yet to permit systematic withdrawal for 40 percent of your corpus on vesting, so that will mandatorily have to be converted into annuities for pension income.
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