Partial Withdrawal from NPS Exempt from Tax -Introduced in Budget 2017

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. 
Partial withdrawal from a Tier-I account is possible only under certain specified circumstances. There are no such restrictions on withdrawals from Tier-II accounts. But it should be noted that a government employee contributing to Tier-II account and claiming deduction under section 80C of the Income Tax Act, 1961 up to Rs.1,50,000 are not given the flexibility to withdraw before completing a 3-year lock-in period. 

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 for subscriber, spouse or children.
  • Meeting medical and incidental expenses arising out of the disability or incapacitation suffered by the subscriber.
  • 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has also made contributions to your NPS account, note that only a maximum of 25% of your share of contributions can be withdrawn.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 are eligible for tax deductions.
• Government employees are eligible for a deduction under section 80C for the contributions made to Tier-II NPS account after the 3-year lock-in -period. This is however not available to non-government employees.

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