NPS Exit & Withdrawal Rules & Taxation (Latest 2023 Update)

The National Pension System (or NPS) is a retirement savings product that allows investors to invest in equity and debt as a means for proper retirement planning. And it is aimed at providing a pension at the time of retirement which usually starts from the age of 60 years.

Many people get attracted to NPS as it gives Rs 50,000 extra tax benefit to its subscribers. But retirement for most young-to-middle aged people is decades away. And NPS is an investment product that requires long term commitment.

So before you chose NPS as a good option for retirement savings, it would be wise to first completely understand how and when you get your money back from NPS. And by getting money back, I mean:

  • When and how you get money back at regular retirement of 60? This is the case of regular Exit from NPS.
  • When and how you get money back if you chose to go for early retirement or wish to exit from NPS much before 60? This is the case of Premature Exit from NPS.
  • What if you need some money for some needs but don’t want to close the NPS? This is the case of Withdrawal from NPS without Exiting.

It should be highlighted here that NPS offers 2 types of accounts – Tier-I and Tier-II. The Tier-I account is mandatory to open if you wish to invest in NPS. This Tier-I account is the primary account for retirement savings and all the rules of exit and withdrawal from NPS are applicable to this Tier-1 account. On the other hand, the Tier-II account can be opened only after the subscriber has opened a Tier-I account and generally, there are no restrictions on withdrawals from the Tier-II account.

Note – If you wish to find out how much money you can save using NPS, then do check this FREE Download Latest NPS Excel Calculator which calculates NPS maturity corpus and NPS Pension in retirement.

Without further delay, let’s find out what are the latest NPS Exit Rules (2023) and the latest NPS Withdrawal Rules (2023).

Latest NPS Exit Rules (2023)

Here are the rules for exit from the National Pension Scheme (NPS)

  • When NPS subscriber reaches the age of 60 (or Superannuation), he will have to mandatorily use at least 40% of the accumulated NPS pension corpus to purchase an annuity (which will give monthly pension). The remaining corpus (60% or lower) can be withdrawn tax-free as a lump sum.
  • If the total accumulated NPS corpus is less than Rs 2 lac, the subscriber can make 100% lumpsum withdrawal.
  • The lump sum withdrawal can be postponed till a subscriber attains the age of 70 years. This rule was made to make it tax-efficient for subscribers to withdraw lump sum (when the old rule was 40% tax-free and 20% taxable lumpsum withdrawal). But since now entire 60% corpus is available for tax-free withdrawal, this option allowing postponement of lumpsum withdrawal is not of much use.

That was about when you exit NPS at the regular age of 60. Now let’s see what are the rules if you wish to exit NPS before you reach 60 (important to know for those who plan to retire at 40 or even a few years before 60):

Latest NPS Premature Exit Rules (2023)

  • If NPS subscriber decides to exit NPS before the age of 60 (like in case of voluntary retirement or early retirement), then he will have to use minimum 80% of the accumulated NPS corpus to purchase the annuity. Only the 20% or less remaining corpus can be withdrawn tax-free as a lump sum.
  • In can of death of NPS before retirement, the nominee can withdraw the full accumulated amount as a lump sum. Though they have the choice to buy any of the annuities being offered if they so desire. In case of the government NPS, 80% of the accumulated corpus has to be used to buy an annuity and the balance is paid out to the nominees as a lump sum.

So now you know that if you do plan to use NPS as a retirement savings product but are exploring early retirement, then you need to remember that you will necessarily have to use 80% of NPS corpus to purchase an annuity.

That was about normal and premature exit from NPS. However, at times you may need to withdraw money from NPS for some important goals or medical or similar contingencies. Right? NPS now has a provision for partial withdrawal subject to few rules. Let’s see what these rules are:

Latest NPS Withdrawal Rules (2023)

NPS withdrawal is different from NPS exit. The NPS withdrawal rules are for cases when the NPS account isn’t closed (as is done in Exit) and only partial withdrawals are made.

These rules are applicable to Partial withdrawal from NPS Tier-1 accounts:

  • Partial withdrawals can only be made from NPS if the Subscriber has had an active NPS account for atleast 3 years.
  • Also, there is a limit on the amount of money that can be partially withdrawn from Tier-I NPS. The limit of withdrawal is up to 25% of only the subscriber’s own contribution (excluding employer’s contribution). Therefore, if both you and your employer are jointly contributing to your NPS account, then the maximum amount that can be withdrawn from your account will be calculated on the basis of the contributions made by you only and exclude your employer’s contributions.
  • The withdrawal can only be made for the clearly-defined expenses like Children’s Higher Education, Children’s Marriage, Construction / Purchase of First House, Treatment of 13 critical illnesses for self, spouse, children and dependent parents and to start a new business venture. And No partial withdrawal will be allowed from the NPS account in any other situations.
  • As for the Tier-II NPS account, there is no such limit or conditions attached on partial withdrawal from it. But the government employees who are claiming deduction under section 80C of the Income Tax Act on the Tier-II account don’t have this flexibility and cannot withdraw money from NPS Tier-II account before 3 years if they have claimed the deduction for tax benefits.
  • Also, there are limits to how many times you can withdraw from NPS. The partial withdrawal, in accordance with above conditions, can happen a maximum of only 3 times during the entire tenure of NPS subscription. No further partial withdrawals will be allowed, once the individual has made three withdrawals. And these withdrawals are exempted from taxes.

As a side note, be reminded that most of the rules and limits on exit and withdrawals are for NPS Tier-I account. If you are a common citizen and have money parked in NPS Tier-II account, then you are free to withdraw as and when you require. But your contributions to NPS Tier 2 Account don’t qualify for tax rebate either. The case is slightly different for NPS contributing government employees. Their contributions to the NPS Tier-II account are eligible for tax deduction under Section 80C up to Rs 1.5 lakh per annum, but there would be a lock-in period of 3 years. The returns on NPS Tier 2 account contributions are taxable at slab rates as applicable to the individuals.

Interestingly, NPS (All Citizens) subscribers can choose not to Exit NPS at age 60 and instead they can if they wish, continue to contribute to NPS account up to the age of 70 to further grow their NPS corpus. Though they can also exit at any point between the age of 60 and 70 by registering a withdrawal request.

Note – Before 2004, the government employees were eligible for pension under the Old Pension Scheme (OPS) system. Under this scheme, the pensioner used to get a starting pension of 50% of the last drawn salary. This was a defined benefit system, unlike NPS which is a defined contribution system. Do check the difference between NPS and OPS to know more.

The PFRDA’s site has a list of FAQs on NPS Exit and Withdrawals. You can refer to it if you wish to know more about it.

Since NPS is retirement-specific savings product, it goes without saying here that Retirement Planning is a long term goal. And to be honest, you just get one shot at saving properly for retirement. So if you get it wrong, you run the risk of running out of money before dying. And that is a scary situation to be in. So it’s very important to not ignore retirement as you are busy with other goals.

Instead, its best to give retirement the importance it deserves.

Our generation will have a long retirement. And we need to plan for it judiciously. If you need the help of SEBI Registered Retirement Planner, you can check:

Stable Investor’s Retirement Planning Service

As for NPS, I hope this post brings clarity about the latest NPS Exit and Withdrawal Rules 2023 that you need to be aware of as NPS investor.

But do understand that when it comes to retirement, products like PPF (How to become PPF Retirement Crorepati) and SIP in good Equity Funds are also good options for saving for your retirement years. And feel free to use this Free NPS Excel Calculator to know how much pension you can get from NPS at retirement.

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