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Partial withdrawal from NPS exempt from tax -Introduced in Budget 2017

Updated on :  

08 min read.

The National Pension Scheme is a voluntary retirement scheme introduced by the Central Government. People can invest in such pension account regularly and receive 60% of it as a lump sum amount on attainment of 60 years of age and the remaining as annuity pension. However, the scheme also allows partial withdrawal from the NPS account. This article attempts to simplify the partial withdrawal rules and the tax benefits thereon.

Partial Withdrawal from NPS 

Before we delve into the withdrawal rules, let’s understand some basics. There are two types of NPS accounts- Tier I and Tier II. If you wish to subscribe to NPS it is mandatory for you to open a Tier-I account. Tier-II is an add-on voluntary savings account to a Tier-I account holder with flexible rules.
There are such restrictions on withdrawals from Tier-II accounts. Also, there is no tax benefit on the contributions made to this account except in case of a central government employee. A central government employee can claim a tax deduction on his contributions to Tier-II account under section 80C up to Rs. 1,50,000 only if he completes a 3-year lock-in period.
However, partial withdrawal from a Tier-I account is possible only under certain circumstances.

Withdrawal terms and conditions

  • Partial withdrawal from a Tier-I account is allowed only under the following circumstances:
    • Higher education of children;
    • Marriage of children;
    • Purchase or construction of residential house or flat in own name or in joint name with the spouse;
    • Treatment of specified illnesses;
    • Setting up a new venture or a start-up; or
    • Meeting expenses for skill development, reskilling or self-development activities.
  • A maximum of 3 withdrawals are permitted during the entire tenure, i.e. date of joining till 60 years of age;
  • You must have been in the National Pension System for at least three years from the date of joining; and
  • Maximum withdrawal of 25% of the contributions made by you is permitted. If your employer has also made contributions to your NPS account, note that only a maximum of 25% of your share of contributions can be withdrawn.

Tax Treatment on partial withdrawal from NPS

  • 25% of the permissible withdrawal from the NPS account is tax-free.
  • The contribution made to the Tier-I account is eligible for tax deductions.

FAQs

What is meant by specified illness?

The Pension Fund Regulatory and Development Authority (PFRDA) has specified the following as specified illnesses:

  • Cancer
  • Kidney failure
  • Primary Pulmonary arterial Hypertension
  • Multiple Sclerosis
  • Major Organ Transplant
  • Coma
  • Myocardial infarction
  • Stroke
  • Heart Valve surgery
  • Aorta Graft Surgery
  • Paralysis
  • Serious Life-threatening accidents
  • Coronary Artery Bypass Graft
  • Total blindness
  • Covid-19
  • Any other illness specified by PFRDA, which critical in nature and life threatening.

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