Partial Withdrawal From NPS: Withdrawal Rules and Tax Implications

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.1.5 lakhs are not given the flexibility to withdraw before completing a 3-year lock-in period. 

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Withdrawal Terms And Conditions

Tier-I Withdrawal Rules

• 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 of NPS. There is a 5-year gap required between each withdrawal.
• You must have been in the National Pension System for at least three years from the date of joining; and
• Withdrawal Before Retirement- A Maximum withdrawal of 25% of your contributions is permitted. If your employer has also made contributions to your NPS account, note that only 25% of your contributions can be withdrawn.
• Withdrawal On or After Retirement- Maximum withdrawal of 60% of the NPS corpus as a lump sum on attaining the age of 60 Years permitted. 40% should be utilized to purchase an annuity plan.

Tier-II Withdrawal Rules

• There are no restrictions for withdrawal from NPS Tier-II account. 
• But for central government employees who have claimed 80C deductions on contributions made in NPS Tier-II account, the amount withdrawn within 3 years is taxable on the year of withdrawal 
• The 80C deduction claimed has to be reversed in the year of withdrawal.

Tax Treatment on Partial Withdrawal From NPS

Tier-I Withdrawal Tax Implications

• The permissible withdrawal of 25% of your contribution is tax-free.

Tier-II Withdrawal Tax Implications

• The withdrawal or fund manager change in NPS Tier-II account is fully taxable and considered as capital gains.
• They are taxed as short term or long term capital gains based on period of holding.
• If you have chosen to be an active manager, and opted for equity funds, then the funds are treated as equity oriented fund, covered under section 111A and 112A.
• Equity oriented funds held for less than 12 months are taxed at 20% whereas funds held longer than 12 months are taxed at 12.5 %. Exemption of Rs. 1.25 lakh can be claimed for LTCG u/s 112A.
• Other securities, if held for a period less than 24 months are treated as short term capital gains, taxed at slab rates. Else, it is treated as long term capital gains, taxable at 12.5%, without indexation.

Final Word

NPS withdrawals are taxed differently depending on the timing of withdrawal, permissible limits, and on the fact whether it is NPS Tier-I or Tier-II investment.