Don't withdraw from the NPS corpus unless you are facing an emergency

While new online facility will make part withdrawal convenient, subscribers must exercise restraint

The Pension Fund Regulatory and Development Authority (PFRDA) has made it possible for account holders in the National Pension System (NPS) to make partial withdrawals from this fund through an online process. The enhanced convenience should, however, not encourage account holders to withdraw from this retirement fund unless they are facing an emergency.

Limits and preconditions attached

NPS account holders can make a partial withdrawal from their fund after they have completed three years. There is also a limit to how much they can withdraw. The rules say a subscriber can withdraw up to 25 per cent of his/her own contributions. Suppose you have invested Rs 5 lakh in your account, but the corpus has grown to Rs 12 lakh. The rules say you can only withdraw 25 per cent of your own contributions, which is Rs 5 lakh in this case. In other words, the subscriber will be able to withdraw only Rs 1.25 lakh.

When it was first launched, NPS did not allow partial withdrawals. “That is not the case anymore. Subscribers can make partial withdrawals, but only for specific purposes, like illness or disability, for an offspring’s marriage or education, the purchase of a property, or to start a new venture,” says tax and investment expert Balwant Jain.

There are also limits on the number of times partial withdrawals can be made. “The NPS subscriber can only make three partial withdrawals in his overall tenure,” says M Barve, founder, MB Wealth Solutions. 

There must be a gap of five years between two withdrawals. However, this condition of a gap does not apply in case the withdrawal is being made for the treatment of a specified illness. “By limiting withdrawals to three times, the regulator has ensured the subscriber does not touch this money unless there is an urgent need,” says Barve.

How to withdraw

Now, a subscriber does not need to submit his/her application for partial withdrawal at a nodal office or point of presence, along with documents substantiating the reasons for partial withdrawal. Instead, in the online application, he/she can merely make a self-declaration. The money will get transferred into his/her bank account on the fifth day.

Who should withdraw

NPS is meant to help subscribers accumulate a sufficiently large corpus that can provide them with an adequate pension during retirement. Making partial withdrawals will hamper that goal. “Do not touch the NPS corpus unless it is a life-and-death situation,” says Jain. He adds that in case of need, the order in which you should withdraw from various instruments should be as follows: Fixed deposits, mutual funds, Public Provident Fund, and only then from NPS and Employees’ Provident Fund.

Tax treatment of withdrawn amount

Partial withdrawal is tax-exempt, informs Gopal Bohra, partner, NA Shah Associates.

However, the tax treatment is different if the subscriber exits his NPS account prematurely — before 60 years of age. In that case, he/she will be allowed to withdraw up to 20 per cent of the corpus as lump sum, while the balance 80 per cent will have to be annuitised.

The lump-sum amount will be tax-exempt, while income from the annuity will be added to his/her income and taxed at the slab rate. If the accumulated corpus is less than Rs 1 lakh, the entire amount is paid as lump sum to the subscriber.