It’s time to wipe the slate of last financial year and the clock of investment must be reset based on your current goals. One of the advantages of the National Pension Scheme (NPS) is it offers both tax incentives and a retirement corpus.
Now that the no-tax limit under the New Tax Regime (NTR) has been increased to ₹12,00,000, the need for investing in NPS just for the sake of availing tax-benefit has reduced considerably. Against this backdrop, question arises if the NPS corpus could be withdrawn; if so, what are the rules? Let’s dive into details.
Also read: No tax on up to ₹12 lakh income but why slabs?
Account type, exposure
NPS provides two types of accounts for all its citizens — Tier-1 (mandatory) and Tier-2 (optional). For opening a Tier-2 account, you must have a Tier-1 account. Both the accounts differ from each other in terms of tax benefits as well as withdrawal rules.
Tier-1 is the default individual Pension Account for building retirement corpus. After retirement, subscribers of NPS will get pension from the chosen Annuity Service Providers (ASPs) as per the agreed terms and conditions.
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Tier-2 acts like a savings account. In both the accounts, you can gain exposure to four kinds of assets: equity instruments, corporate bonds, Government Securities and Alternative Investment Funds (AIF). In Tier-1, maximum exposure to equity is 75% and AIF 5%. However, in Tier-2, 100% equity exposure and 5% AIF is possible.
One-way switch
You cannot transfer funds from Tier-1 to Tier-2 but you can transfer from Tier-2 to Tier-1 account or to your bank account.
Tax benefits
In Tier-1, you can claim an additional tax deduction of ₹50,000 per year under 80CCD (1B) of the Income Tax Act under Old Tax Regime (OTR). Under NTR, self-contribution to NPS is not considered. But, if employer contributes to NPS, you can claim deduction under Sec. 80CCD(2) up to 14% of your basic salary.
Withdrawal
Normally, subscribers could withdraw only 60% of the corpus as lumpsum and 40% must be used to purchase an annuity plan for receiving pension. At the time of maturity, if the corpus is less than ₹5 lakh, annuity is optional and entire corpus would be paid as lumpsum.
NPS offers three kinds of withdrawals — partial withdrawal, premature withdrawal and withdrawal owing to unfortunate death of the subscriber.
Death: If the subscriber (of a private sector) dies before or after 60 years of age, the entire corpus (100%) would be payable either to his/her nominee or legal heirs. The nominee or the legal heir can opt for annuity, but is not mandatory. If a subscriber is a government employee, then his/her dependent must purchase annuity.
Partial withdrawal: You can partially withdraw from Tier-1 only after completion of three years from the date of opening of NPS. Reasons can be disease or disability, higher education, marriage, property purchase or for starting a business venture.
Rakshita (20025628), executive, KFINTECH, one of the Central Record-keeping Agencies for NPS, said, “A subscriber can make only three partial withdrawals during the entire tenure. Each withdrawal is limited to 25% of his/her own contributions. Say if Mangala contributed ₹50,000 every year since 2020, her contribution on December 31, 2024 would be ₹2,50,000. So, she could withdraw only ₹62,500 (25%) of her contribution for the first time, though the investment amount would have grown to ₹4,00,000 in five years. Also, between each withdrawal, there must be a gap of five years. Let’s assume Mangala wanted to withdraw again after seven years. In these seven years, if she had contributed just ₹2,000 per year, then, she could withdraw only 25% of ₹14,000 (7-year contribution) only but not 25% of her overall corpus.”
Premature drawal: If you want to close NPS account before 60 years, you can do so but only after completion of five years from the date of opening of NPS account. In this case, you can withdraw only 20% of the corpus as lumpsum and 80% must be used for buying an annuity pension plan; but if the corpus is below ₹2.5 lakh, annuity is not mandatory.
Deferment
If needed, subscribers can withdraw the 60% corpus in instalments instead of taking it in a single shot. They can defer withdrawal and continue to stay invested in NPS till 75 years of age. They have the choice to defer only the 60% corpus (lumpsum) or only the 40% annuity or defer both.
(The writer is a NISM & CRISIL-certified wealth manager)
Published – April 21, 2025 06:30 am IST
