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NPS Withdrawal Rules and Applicable Taxes – Updated for 2019

We discuss the latest NPS withdrawal rules and taxes applicable on exit from NPS Tier 1 account.

Since NPS Tier 1 account is a retirement account so the government has put in place an elaborate set of withdrawal rules. The main purpose of these rules is to discourage early withdrawals so that NPS subscribers have a significant corpus left at the time of retirement. The government has also put in place a requirement to purchase an annuity with at least a part of the retirement corpus, to ensure a regular source of retirement income.

However, following public feedback that NPS withdrawal rules were too strict, many changes have been introduced in recent times. NPS partial withdrawal rules - which allow you to withdraw a part of the corpus without closing NPS account – have been made less stringent.  Also, the tax benefit for investing in NPS Tier 1 has been increased. In Budget 2019, NPS exit has become tax-free giving NPS an “EEE” status.

In this post, we look at the updated withdrawal rules after all these changes. Unless otherwise specified, these rules are valid for the All Citizens model.

There are two questions that we do not answer explicitly in this post: What is the exact method for withdrawing money from NPS Tier 1 account and NPS Tier 2 account withdrawal rules. We will tackle them in future posts.

NPS withdrawal rules explained in one infographic

This infographic explains NPS Tier 1 account withdrawal rules and applicable taxes

We explain the contents of this infographic in greater detail the rest of this article

How to close NPS account? 

For NPS Tier 1 accounts, 4 kinds of withdrawal or exit are possible:

Normal exit

This is exit from NPS at the age of 60/superannuation. In this case, you fully withdraw your money and close the account. 

Within normal exit there is also the provision for extending the account beyond retirement if funds are not needed immediately. In this case, the subscriber can opt for deferral (extending account without further contribution) or continuation (extending account with further contribution)

Premature Exit

This is exit from NPS before the age of 60/superannuation. In this case, again you fully withdraw your money and close the account. This makes it different from partial withdrawal where you do not close the account.

Exit due to death of the subscriber

Partial Withdrawal 

This is early withdrawal where you can withdraw a part of your corpus but still continue with the account. 

Normal Exit/Exit at Retirement from Tier 1 account

What is Normal exit?

For any citizen who has joined NPS before 60 years of age, normal exit is defined as exit at the age of 60 or superannuation. 

However, subscribers can join NPS up to the age of 65 years. For any subscriber who joins NPS between 60 and 65 years of age, normal exit is defined as a subscriber exiting after at least 3 years. 

If a subscriber opts for premature retirement due to disability or incapacitation, then such an exit, even though it is premature is still treated as normal exit. 

Withdrawal rules for normal exit

On normal exit, a subscriber needs to use at least 40% of the accumulated corpus to purchase an annuity. An annuity is a regular income product to provide income after retirement and multiple NPS annuity options are available.  The remaining (i.e. up to 60%) can be withdrawn as lump sum or in one go. 

If the total accumulated corpus is less than 2 lakhs, then the entire amount can be withdrawn as lump sum. 

Tax rules for normal exit

The amount that is used for purchasing an annuity can be withdrawn tax-free. However annuity income every year gets added to the taxable income and is taxed according to the regular Income Tax rules.  

Lump sum withdrawal on superannuation is tax free. The maximum lump sum withdrawal allowed under normal exit rules is 60% (min 40% annuity requirement).  In Budget 2019, lump sum withdrawals from NPS, up to 60% have been made tax-free (from 40% earlier). As a result of this change, NPS tax benefit has now become EEE or Exempt-Exempt-Exempt.

There is some controversy about the EEE status of NPS, since annuity income is taxable in subsequent years. We present our take on this controversy in the blog on NPS tax benefits.

Deferral/Continuation of NPS Tier 1 account 

Some NPS subscribers who do not immediately need the money post-retirement may want to continue their account and earn more returns. A subscriber can extend their NPS account till the age of 70 years in two different ways: 
  1. Continuation – where you continue with your NPS account and continue contributing to it or 
  2.  Deferral – where you stop contributing to the account but defer withdrawal to let your corpus earn more returns.

Rules for continuation of NPS Tier 1 account

  • A subscriber can continue contributing to the Tier 1 account till the age of 70 years and continue to enjoy all tax benefits.
  • However, in the case of the continuation, the NPS subscriber will have to operate the account in their own individual capacity i.e. there will be no contribution from the employer.
  • Even after opting for continuation, the subscriber can chose to exit NPS at any time after giving due notice irrespective of the period of contribution indicated by the subscriber while submitting the request to continue.
  • If the subscriber opts for continuation, then the 40% minimum annuity requirement will be applied on the corpus as on the date of final exit from NPS and not the corpus at the age of 60/superannuation.
  • In the event of the unfortunate death of the subscriber during the continuation period, 100% of the corpus will be paid out to the nominees/legal heir of the subscriber. They also have the option to purchase any of the annuities available under NPS in case they so wish.

Rules for deferral of Tier 1 account

  • The subscriber can defer withdrawal from their NPS account till the age of 70 years. In this case, there will be no new contributions.
  • A subscriber can defer both the lump sum and annuity receipts.
  • Lumpsum can be deferred till the age of 70 years which can be withdrawn any time between superannuation and 70 years or every year till the age of 70 years.
  • Annuity purchase can be deferred for a maximum period of 3 years. If the death of the subscriber occurs before the due date of purchase of annuity after deferment, the annuity shall mandatorily be purchased by the spouse. 
  • Deferral option is not available to a subscriber who has already opted for continuation.
  • Deferral option is not available under premature withdrawal (discussed next).

Premature exit/ withdrawal from NPS Tier 1 account

What is premature exit?

For any citizen who has joined NPS before 60 years of age, premature exit is defined as exit before the age of 60 or superannuation.  To be eligible for premature withdrawal, a subscriber needs to hold an NPS account for a minimum of 10 years. In NPS, exit due to voluntary retirement is also treated as premature exit.

For any subscriber who joins NPS between 60 and 65 years of age, premature exit is defined as a subscriber exiting before 3 years.

Withdrawal rules for premature exit

On premature exit, a subscriber needs to use at least 80% of the accumulated corpus to purchase an annuity. The remaining (i.e. up to 20%) can be withdrawn as lump sum amount. 

If the total accumulated corpus is less than 1 lakhs, then the entire amount can be withdrawn as lump sum.

If the subscriber’s age is less than the minimum age for purchase of an annuity, then the annuity will start once the subscriber reaches the minimum age required for purchasing the annuity of their choice from an empanelled Annuity Service Provider. The subscriber will have to continue in NPS in the meanwhile.

Tax rules for premature exit

Just like Normal exit, annuity amount is tax-free but annuity income every year gets taxed according to the income tax rules. Also since the maximum amount that can be withdrawn as lump sum is 20%,  lump sum withdrawal is also tax-free.

Exit due to death of the subscriber

In the unfortunate event of the death of a subscriber, 100% of the accumulated corpus is paid out to the nominees/legal heir of the subscriber as mentioned in the NPS nomination form.  The nominees also have the option to buy any of the NPS annuity options available.  

If a subscriber does not have a nominee then the corpus will be distributed to the family members based on the legal heir certificate issued by competent authorities of State or succession certificate issued by a court of competent jurisdiction.

Partial Withdrawal from NPS Tier 1 

NPS subscribers can also opt for partial withdrawal i.e. withdraw money without closing down their account. Even after availing the option of partial withdrawal, he/she will get the usual benefits applicable at the time of retirement.

Conditions for Partial Withdrawal

1. Partial withdrawal is only allowed subject to certain conditions:
  • Higher education of children
  • Marriage of children
  • For the purchase/construction of residential house (in specified conditions – in his her own name/joint name with spouse, However in case the subscriber already owns a house in single or joint name, other than ancestral property then this is not allowed)
  • For treatment of Critical illnesses – suffered by subscriber, spouse, children and dependent parents. List of critical illnesses: cancer, kidney failure (end stage renal failure), primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, heart valve surgery, stroke, myocardinal infarction, coma, total blindness, paralysis, paralysis, accident of serious/ life-threatening nature, any other critical illness of a life-threatening nature as stipulated in the circulars/ guidelines or notifications issued by the authority from time to time.
  • Meet medical and incidental expenses arising  out of the disability or incapacitation suffered by the subscriber
  • Towards meeting expenses by the subscriber for skill development/re-skilling or any other self-development activities as may be permitted by Authority by issuance of appropriate guidelines in that behalf.
  • Towards meeting expenses by the subscriber for establishment of own venture or start-ups activities as may be permitted by Authority by the issuance of appropriate guidelines on that behalf.
2. Partial Withdrawals are allowed only 3 times during the tenure of your account.

3. To be eligible for partial withdrawal, the subscriber needs to be in the NPS for at least 3 years.

4. The withdrawal amount cannot exceed 25% of the contributions made by the subscriber. Please note that this is 25% of the contributions only not the total corpus which includes contributions plus returns.

Conditions which are no longer applicable for Partial withdrawals

Earlier conditions for partial withdrawal were a lot more stringent but some of these conditions have now been removed to make withdrawal easier. You may however still find these conditions listed in some of the old NPS articles. To make life easier, we have listed below are a list of conditions that used to exist but are no longer applicable.
  • Earlier an NPS subscriber had to be in NPS for at least 10 years to be eligible for partial withdrawal. This has now been reduced to 3 years.
  • Earlier there was a condition of a gap of at least 5 years between subsequent partial withdrawals. This has now been eliminated.
  • Additional reasons have been added to the list of reasons for which partial withdrawal is allowed: Re-skilling and start-up activities (last two points in the list above) are recent additions to the list of reasons for which you can avail of partial withdrawal.

Tax rules for partial withdrawal

Partial withdrawals are tax-free. As mentioned before partial withdrawal does not affect the tax treatment at the time of retirement.

Conclusion

This blog post lists the latest NPS withdrawal rules and withdrawal taxes in 2019. The withdrawal rules and taxes reflect the philosophy that NPS is a retirement product designed to provide regular pension income. Withdrawal rules have been updated over time to make NPS more attractive for investors. We expect more changes in this area going forward and we will constantly keep you updated. Watch out this space for more!

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