All you need to know about withdrawals from NPS account

National Pension Scheme or NPS is a scheme to build a corpus for monthly pension income after retirement. Under this scheme, yearly or monthly investments are deployed into different funds to build a corpus for retirement. The NPS subscriber has to purchase an annuity plan with the corpus collected on retirement. The NPS account contributor can decide which fund he wants to invest in depending on the risk profile. It is possible to make unlimited transfers between the schemes without incurring any capital gains charges.

One important thing to understand while making investment in NPS is the withdrawal. The NPS has a lock in from the time the person enters till the time the subscriber reaches 60 years of age.

Another important thing to consider is the taxability of the withdrawals. The NPS scheme is not an Exempt-Exempt-Exempt scheme like PPF. Withdrawals are partially taxed. This makes it important to understand and plan the taxes.

There are two types of withdrawals from the NPS account:

Premature withdrawals:

A subscriber can make withdrawals 3 times during the entire term of NPS. The gap between any 2 withdrawals must be at least 5 years. Given the huge lock in period, it is possible to plan these premature withdrawals from the NPS account. However, if the withdrawal is made for medical emergencies, then the subscriber does not need to have a gap. Sufficient documentation needs to be provided for the purpose of premature withdrawals.

Under National Pension Scheme withdrawal rules, only 25% of the accumulated balance can be withdrawn at a time. However, when a withdrawal is made, a reason for the withdrawal has to be given. It can be done for reasons like child’s wedding, child’s education, medical emergencies and treatment etc. The Government has clarified that any such premature withdrawals will be tax free. This reduces the tax burden on the subscriber.

The other case of premature withdrawal from National Pension System happens when the subscriber dies. In such a case, any amount to the credit of the account is withdrawn and transferred to the spouse. In case the spouse is dead, the amount goes to the legal heir. This is why it is very important to maintain nomination facility in the NPS account. The Nomination can be done anytime and can be changed anytime as well.

However, these rules are only pertaining to NPS Tier I accounts. If the subscriber has a Tier II account, unlimited withdrawals can be made from that account before maturity. There are no tax rules related to the Tier II account which means the funds can be used on an as need basis.

Withdrawals on maturity:

Under the NPS, the proceeds from maturity have to be used to buy an annuity plan that will provide monthly pension income to the subscriber. At least 40% of the corpus built in the name of the subscriber has to be invested in an annuity plan. The balance 60% can be withdrawn and used for whatever purpose that the subscriber wants.

The withdrawal becomes due when the subscriber reaches 60 years of age. However, the subscriber can maintain the account till he reaches a maximum of 70 years. When the subscriber reaches 70 years, the balance to the credit of the NPS account compulsorily has to be withdrawn. 40% has to be used to purchase an annuity plan. The remaining 60% is tax free. However, the monthly pension that will be received from the annuity plan is taxable as regular pension. There is no other tax benefit on this.