The National Pension Scheme has emerged as a leading long-term voluntary retirement investing programme for working individuals. It allows individuals to save for their retired life and generate a flow of income for the future while they are still working. While NPS was created to help people create a stream of income, it also functions as an emergency reserve by allowing partial withdrawals under certain circumstances.
This makes it crucial to know more about the NPS withdrawal rules and limits to ensure a hassle-free experience when accessing funds invested in National Pension Scheme.
NPS Withdrawal Rules and Limitations
National Pension Scheme subscribers can withdraw their deposited corpus prematurely as long as they meet certain parameters. They are also allowed to make partial withdrawals in case of financial emergencies. However, one should note that there are withdrawal limits that depend on the corpus, the subscribers’ age, and other key factors.
Individuals can make tax-free partial withdrawals by submitting an application either online or by submitting a form to the scheme provider.
However, such withdrawals will be allowed only if:
- The individual should be a National Pension Scheme subscriber for a minimum 3 years
- Their withdrawal amount must not exceed 25% of the investment at a given time
Here are the circumstances under which one can opt for partial withdrawal:
- Children’s higher education
- Children’s marriage
- To buy a flat or house either in share with their spouse or
Note: If a person already has a house in their name they will not be allowed to withdraw funds for this specific purpose
- To account for medical conditions such as kidney failure, organ transplant, cancer, etc.
NPS Withdrawal Rules for Retired Entities
An individual may apply to withdraw as much as 60% of their whole amount as a lump sum, but the remainder, or 40%, will be entered into an annuity plan. The new NPS rules state that National Pension Scheme subscribers can withdraw the invested corpus amount if it’s less than or equivalent to Rs. 5 lakhs without buying an annuity plan. Notably, these NPS withdrawals are also tax-free, which helps protect corpus.
Suppose, Rakesh has an invested corpus of Rs. 4.6 lakhs, then he/she can withdraw the entire sum post-retirement. However, if the amount is more than Rs. 10 lakhs then he can withdraw only up to Rs. 6 lakhs without tax implication. Rakesh will then have to purchase an annuity plan with the remaining Rs. 4 lakhs.
Taking an example of this case, one should note that withdrawals are tax-free but annuity plans are taxed as per the applicable income slab. The payout is also taxed as per the corresponding years of payment.
Withdrawal Rules from National Pension Scheme Rules for Voluntary Retirement
If an individual decides to retire voluntarily before he or she reaches the age of retirement, he or she may choose to out of the NPS before the tenure is completed. However, they must abide by the following rules:
To be eligible for the Nation Pension Scheme withdrawal feature before retirement, an individual must have had an NPS account for at least 10 years.
The new NPS early withdrawal guidelines state that if the value of the corpus is less than or equivalent to Rs. 2.5 lakhs, then the investor can withdraw the full amount.
In case the corpus reaches Rs. 2.5 lakhs, he or she can only take an amount equivalent to 20% of the corpus and use the remaining 80% to acquire an annuity plan.
If Dia has an NPS corpus of Rs. 2.3 lakhs he is allowed to withdraw the entire sum. Conversely, Shreya who has accumulated an NPS of Rs. 10 lakhs is allowed to withdraw only Rs. 2 lakhs and the rest of the fund will be secured on her behalf for an annuity plan.
Notably, both withdrawals will be treated under the tax slabs of Dia and Shreya. Additionally, for Shreya, the annuity amount will also be taxed based on the payment and her income tax slab.
National Pension Scheme Withdrawal Rules: Post Maturity
The maximum age to enter an NPS has been raised to 70, up from 65, and the maximum age to exit the scheme is now 75. Existing members can now invest beyond the age of 60, and their National Pension Scheme account has been extended to the age of 70.
The amended guidelines also permit individuals to remain invested for a prolonged amount of time to build a larger corpus. After maturity, an individual may postpone the purchase of an annuity or the withdrawal of funds for up to 3 years, beginning when they turn 60 or reaches retirement age, whichever comes first.
When an NPS subscriber withdraws a corpus amount, the same conditions like that in the event of retirement become applicable. This implies that they can withdraw only a maximum of 60% of the NPS corpus, with the remainder, or 40% utilized to buy an annuity plan.
For instance, if Trisha has an NPS corpus of roughly Rs. 10 lakhs, she can withdraw a sum of up to Rs. 6 lakhs without any tax implications. However, the remainder of Rs. 4 lahks will be set aside to avail of an annuity plan.
That said, Trisha will pay taxes on the monthly pension, but the annuity payments will be taxed yearly as per her income tax slab.
NPS Withdrawal Rules: In Case of Death of a Subscriber
For private sector employees:
In case of the death of a subscriber, their legal nominee or heir can withdraw the NPS corpus in full in case of private-sector employees. There’s no option to purchase an annuity in the event of the subscriber’s death.
For government employees:
Government employees’ heirs/nominee get the option to either withdraw the accumulated fund or opt for a pension.
NPS Withdrawal Guidelines: Tier I and II
NPS subscribers can choose to withdraw partially from their account in these situations:
For Tier I
- To treat chronic health conditions
- To invest in children’s higher education
- For planning children’s marriage
Notably, individuals who parked money in National Pension Scheme for at least 3 years are allowed to withdraw a maximum of 25% of their contributions towards NPS.
During the NPS tenure, a subscriber is allowed to apply for partial premature withdrawals only thrice. Subscribers can make partial withdrawals without any cost.
For Tier II
Withdrawals are allowed only through POP-SP. NPS tier II subscribers need to fill out a UOS-S12 form and submit relevant documents to initiate the process. Typically, it takes 3 days to complete the disbursal.
Since NPS tier II accounts are voluntary in nature, there are no restrictions on withdrawals. This means the subscribers can withdraw any amount from their accumulated corpus to meet any requirement. However, tier II accounts are excluded from claiming tax benefits.
Documents Required for NPS Withdrawal
Here’s a list of documents deemed essential to initiate NPS withdrawal:
- Duly filled and signed advance stamped receipt
- Revenue stamp of the NPS subscriber
- Bank passbook
- A cancelled cheque
- Bank’s letterhead
- Bank certificate with account holder’s name, account number, and IFSC code
Subscribers who qualify for withdrawal will need to submit KYC documents and their PAN card.
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