The National Pension System (NPS) offers structured withdrawal options, balancing immediate financial needs and long-term retirement planning. Here’s a detailed look at the withdrawal processes under NPS:
Partial Withdrawal after Five Years
After completing five years under NPS, you are eligible for partial withdrawals of up to 25% of your contributions. However, premature withdrawals are more stringent. You may withdraw up to 20% as a lump sum after five years, with the remainder mandatorily allocated to annuity purchases. Upon final exit, you have the option for staggered withdrawals of the lump-sum component.
Creating a robust retirement fund is essential in financial planning, yet liquidity needs may arise unexpectedly. Similar to the Employees’ Provident Fund and the Public Provident Fund, the NPS discourages interim withdrawals. Nonetheless, provisions exist for partial liquidity, ensuring the primary corpus remains largely intact.
Partial Withdrawal Process
NPS allows two types of accounts: Tier-I and Tier-II. The Tier-II account is a voluntary savings account with no withdrawal restrictions. The Tier-I account, the main retirement account, has specific withdrawal rules. Partial withdrawals from Tier-I are permitted under certain conditions:
- You can withdraw 25% of your contributions (excluding employer contributions and returns) after three years.
- Withdrawals are allowed for specific purposes such as illness treatment, disability, education or marriage of children, property purchases, or starting a new venture.
- You can make a maximum of three partial withdrawals throughout the investment period.
Premature Withdrawal
You can opt for a complete exit from the NPS before the age of 60, but it involves certain conditions:
- Premature withdrawals are not permitted before five years of investment. For those who begin investing after the age of 60, the period is reduced to three years.
- Upon premature exit, you can withdraw up to 20% of the corpus as a lump sum, with the remaining 80% required to purchase an annuity from approved life insurance companies.
- If the total corpus is below Rs 2.5 lakh, the entire amount will be disbursed as a lump sum.
Final Exit at Maturity
At the age of 60, you can make a final withdrawal with the following options:
- Withdraw up to 60% of the corpus as a lump sum, which is tax-free.
- The remaining 40% must be converted into annuities, with the annuity income taxable according to applicable slab rates.
- If the total corpus is below Rs 5 lakh, the entire amount can be withdrawn as a lump sum.
Staggered Withdrawal Until 75 Years of Age
Introduced by the Pension Fund Regulatory and Development Authority in 2023, this option allows you to withdraw the 60% lump-sum component gradually through a systematic lump-sum withdrawal (SLW) facility, akin to mutual funds’ systematic withdrawal plans.
Upon reaching 60 years of age, NPS subscribers must choose between lump-sum withdrawal and systematic withdrawal. The proceeds can be received monthly, quarterly, half-yearly, or annually until the age of 75. However, 40% of the corpus must still be converted into annuities, providing a steady pension income.
