How often can you partially withdraw from NPS?

Arnav Pandya, Founder, Moneyeduschool, says from February 1, this new circular puts into place rules from 1st February has everything in one single place and this is the only thing that you need to look at when you are going to think of a partial withdrawal and partial withdrawal means a part of your invested amount is what you can take out before retirement.



This is not something new that we have just discovered. The notification had come sometime in January but it has come in effect from February 1st. What exactly is the partial withdrawal rule now that goes with NPS as an investment instrument?

Arnav Pandya: The partial withdrawal rule of the NPS allows you to withdraw a small part of your investment before you reach the age of 60 which is the normal time when you are able to take out the money from the NPS in the tier I account.

In the tier II account, you can invest and take out money whenever you want, but in the tier I account, the normal process is that the money can be withdrawn only after retirement. Now, the second point is that these rules related to the partial withdrawal were there earlier also, but what has been now done is that everything has been consolidated and at one place you will now be able to find all these rules together.

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So, there is no element of confusion there and one does not have to go to different places to look at what were the changes made at different points of time.

So, this new circular which puts into place these rules from 1st February has everything in one single place and this is the only thing that you need to look at when you are going to think of a partial withdrawal and partial withdrawal means a part of your invested amount is what you can take out before retirement.

So, let us also list out the criteria based on which you can apply for this partial withdrawal and also because this partial withdrawal there is a cap to the amount, to the corpus also that can be withdrawn.

Arnav Pandya: There are three main things that you need to look at. 1) When can you opt for partial withdrawal? You can opt for a partial withdrawal from your tier I account only if you have completed three years as a subscriber with the NPS. This three-year completion is very important, before that you cannot opt for the partial withdrawal.

2) How much can you partly withdraw? The rule says that you can withdraw up to 25% of your contributions to the NPS. Remember one thing that in this calculation, only your contribution and 25% of it is the maximum amount up to which you can withdraw and why is that important because neither any other contribution like for example say if you are in a scheme where your employer is also contributing then that is not to be counted. The earnings on the contribution is also not to be counted. So, only your contribution and 25% of it is the maximum limit up to which the withdrawal can take place.

3) The most important point is also that over the lifetime of the NPS, you can withdraw three times only. So, you need to plan out long ahead in terms of if you are likely to need another partial withdrawal. You cannot do this more than three times over the entire life of the NPS scheme that you are going to go through.

So, how many times during the entire tenure you can opt for this partial withdrawal is it only once or you can apply for it more than once?

Arnav Pandya: No, you can go for it up to a maximum of three times, so that is the limit which is there. So, every time you go, then if you have already made a withdrawal once then you again have to make the calculation based on your additional contribution to the NPS, but the maximum number of times is three.

The first withdrawal that you can opt for should be after three years of staying in NPS? Should the second withdrawal also be after three years post the first withdrawal?

Arnav Pandya: No, the second withdrawal can be at any point of time. So, to get the thing started you need to be a subscriber for a minimum of three years, but you need to take into consideration that you should not use up these withdrawals immediately also because what happens is that say the first time you have withdrawn 25% of your eligible amount and then when you go to withdraw the next time again the limit is 25% of the eligible amount but out of which a part of it you will have to subtract because you already withdrawn it.

So, only the new contribution, 25% of that will be eligible and if you are going to stay with the scheme till say age 60, then you also need to plan out ahead. So, too many close withdrawals is not a good idea though going in for withdrawal itself, you should only do it if you cannot avoid it.

Second is now the circular has listed out very clear reasons why you can go for a partial withdrawal. So, you have to give the reason and that reason has to fall within the points which have been highlighted in the circular, so that has to be a main point which one has to consider.

Since NPS is a retirement instrument, it is always advisable to keep your money untouched. But having said that, we also know that via NPS, you can have schemes connected to equity, debt and various other asset classes but when you do a partial withdrawal, what is the impact on your investment that you might see?

Arnav Pandya: Ideally when you are looking for a wealth building investment, you should always compound that investment so that over a period of time, the corpus grows larger. If you are going to withdraw partially, then obviously the corpus goes down and the compounding will be on a lower base. So that is a negative thing which is why one should try and avoid.

The other point which also I want to highlight is that the reasons you can withdraw are now very clearly laid out. So unless it falls into one of these categories, you cannot withdraw. For example, you can withdraw for higher education for your children. The second thing is you can withdraw for the marriage of your children.

The third thing is that you can withdraw for either the construction or the purchase of a residential property either in your name, which is the subscriber’s name or jointly with the spouse. But the condition here is that you should not have an existing residential property already unless it has come through a will or from inheritance.

The other reason why you can withdraw is for treatment of specific health conditions, which is cancer, stroke, and so on, which have been listed out there. But surprisingly, the other thing is that there are two very interesting reasons why you can withdraw also. One is that it allows withdrawal for the process of acquiring new skills or up-skilling.

So something which can help you in your career, that is an eligible reason under these rules. And the final thing is that you can also withdraw if you want to use it to start up a new venture or a startup. So these are very interesting points. Apart from where you have to do it, these two points are also included in the circular. The reason you are withdrawing it also needs to be taken into consideration because ultimately, the base on which your corpus is going to grow is going to go down after the withdrawal.

You cannot be having the same reason for partial withdrawal every time that you are doing. I want to understand the tax impact that you might have on your entire corpus collected.

Arnav Pandya: If you are withdrawing partially, then the tax impact is at that amount which you are withdrawing is tax-free because one, you have to look at it this way that you are only withdrawing your own contribution. So this does not include any earnings on the contribution at all. And the income tax clearly provides that up to 25% withdrawal, which you do partially before this period of time, is not liable to be taxed. So that is a relief as far as the tax front is concerned.

Otherwise, if you just allow the corpus to grow, then at the time of retirement, you can withdraw a lump sum of 60% tax-free and the remaining 40% has to be converted into an annuity. At that point of time, there is no tax, but once the annuity starts coming in, that will be taxed in the hands of the receiver.

You cannot be having the same reason for partial withdrawal all the three times that you might want to withdraw your money, you need to specify a different reason.

Arnav Pandya: That might not necessarily be the case because if you have a medical treatment for which you might want to withdraw, then the same reason might be there. The circular, as far as I know, does not say that you cannot have the same reason.

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William Murphy

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