Understanding National Pension System (NPS) Withdrawal

The National Pension System (NPS) constitutes a government-sponsored pension plan that aims to provide retirement income to its members. This is a voluntary long-term investment plan regulated by the PFRDA (Pension Fund Regulatory and Development Authority). Open to public-private and unorganized sector employees alike, individuals invest contributions made to the NPS in a mix of equity, corporate bonds, government securities, and alternatives. Grasping the whole concept of the rules and processes regarding NPS withdrawal can make a difference in terms of the benefits one receives.

NPS Withdrawal Conditions

The moment a salaried individual reaches the age of sixty years, they will commence withdrawal from the National Pension Scheme. The individuals can also opt for premature withdrawals in some cases. Such cases include situations like critical illness, education, marriage of children, or purchase/construction of a residential house. Certain provisions allow an individual to withdraw from the NPS before the age of 60, depending on their line of reasoning for the cause of exit.

Types Of NPS Withdrawal

NPS withdrawals can be classified by time and purpose:

Withdrawal Upon Superannuation (On Retirement): A subscriber can withdraw from the NPS at the age of 60. This provides for an option to withdraw 60% tax-free as a lump sum from the accumulated corpus, leaving the remaining 40% to be put into an annuity plan with a PFRDA-registered insurance company for regular monthly income after retirement.

Withdrawal Upon Premature Exit: A subscriber wishing to exit from the NPS can have 20% distributed immediately as a one-off payment, while they must use 80% for purchasing annuities.

Partial Withdrawals: Subscribers can make partial withdrawals under certain defined criteria after three years in the scheme. They can withdraw a maximum of 25% of their contributions only (not including contributions made by the employer) for the higher education of children, marriage, critical illness, or purchasing a residential house.

Procedure of Withdrawal

To withdraw from the NPS, a subscriber must request a withdrawal online or offline. The online withdrawal request may be initiated through the CRA (Central Recordkeeping Agency) system on the basis of login identification by the subscriber. In the case of offline withdrawals, the subscriber has to fill in a requisite form with required documentation and submit it to their respective nodal office or PoP (Point of Presence).

Documents required generally consist of

PRAN card (Permanent Retirement Account Number)

Identity proof

Address proof

Bank account details

Proof of age or date of birth

Cancelled cheque or bank statement

Tax Views on NPS Withdrawal

NPS withdrawal enjoys a peculiar tax treatment in the Income Tax Act. The lump sum amount out of 60% of the corpus at retirement is exempt from tax only if a subscriber is above 60 years old at the moment of withdrawal. The sum invested in the annuity is not taxed, while any pension from the annuity is taxed as income.

In case of premature exit, the tax exemption is limited and only the portion withdrawn as a lump sum will partially qualify for tax exemption. Any premature withdrawals up to the 25% cap will be exempt from tax according to certain conditions.

Withdrawal on Death of Subscriber

In the event of the demise of a subscriber, the entire amount accumulated in the corpus will go to their nominee or legal heir. There is no compulsion for the nominee to invest in an annuity, and they can withdraw the full amount. However, they retain the option of purchasing an annuity from an insurer registered with the PFRDA.

Points to Note on NPS Withdrawal

The initiating party of the withdrawal must ensure that all Know Your Customer (KYC) details have been updated in the NPS system.

In case at retirement the corpus is ₹5 lakh or below, the full amount can be withdrawn as a one-time payment.

For a premature exit, a withdrawal may be complete if the corpus is ₹2.5 lakhs or less.

An annuity purchase from a life insurance corporation registered with PFRDA is made compulsory for the mandatory allocation under the rules.

The pension through annuity depends on the subscription option from the subscriber and the terms of the insurer.

Conclusion

For any subscriber intending to plan well for their retirement, knowledge of the NPS withdrawal rules is extremely important. Tax and other implications should then follow as the respective stated options on the withdrawals and, consequently, the relative conditions.