NPS withdrawal rule changes from Feb: How it works

The rules to withdraw money partially from the National Pension System (NPS) have changed from this month. What are the new rules for withdrawing money partially from What should you keep in mind if you opt for an NPS partial withdrawal? Should you go for withdraw partially from your pension fund or avoid it altogether? ET Wealth Online explains:


What are the new rules for NPS partial withdrawal?

Starting February 1, 2024, an NPS subscriber can withdraw from his pension account if it has completed three years. Keep in mind that there is a limit on how much you can withdraw. An NPS account holder can withdraw up to 25% of his contributions, according to the master circular released by the Pension Fund Regulatory and Development Authority (PFRDA) on January 12, 2024. Withdrawal cannot be made from the portion of the corpus contributed by the employer. Further, the returns generated on the contributions will also not be eligible for partial withdrawal.

Let me explain it with an example to make it easier for you to understand. Suppose you have invested Rs 4 lakh in NPS and your corpus has grown to Rs 10 lakh. According to the rules, you can only withdraw 25% of your contributions — so 25% of Rs 4 lakh is Rs 1 lakh. The entire NPS corpus of Rs 10 lakh will not be eligible for partial withdrawal.


Partial withdrawal from NPS is allowed for the following purposes, as mentioned by the PFRDA

a) For children’s higher education

b) For children’s marriage

PFRDA has clarified that children include legally adopted children

c) For the purchase or construction of the first house.

“Previously, subscribers could make partial withdrawals for the purchase or construction of a house in their name or jointly with their spouse, without the limitation of it being their first house. Now, if subscribers already own a house, they are not allowed to make partial withdrawals for this purpose,” says Nirav Karkera, Head of Research at Fisdom.

d) For the treatment of specified illnesses, including hospitalisation and treatment expenses for diseases such as 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, myocardial, infarction, coma, total blindness, paralysis, accidents of serious/life-threatening nature and Covid-19, among others.

e) For medical and incidental expenses arising from the disability or incapacitation suffered by the subscriber.

f) For NPS subscribers’ skill development/re-skilling or any other self-development activities.

g) For establishment of ventures or any startups by the NPS subscriber

NPS partial withdrawal: How often can you use the withdrawal option?

How many times can an investor withdraw money partially from your NPS account? Withdrawals from your NPS account are limited to a maximum of three times throughout the account’s tenure. There must be a gap of five years between the withdrawals. However, this condition of a gap does not apply in case the withdrawal is being made for the treatment of a specified illness. “For subsequent partial withdrawals, only incremental contributions made by the subscriber from the date of the previous partial withdrawal shall be allowed,” says PFRDA. “You can withdraw only 25% of the contributions made by you between two partial withdrawals,” says Karkera.

How can you make partial withdrawal from NPS?

An NPS subscriber needs to submit the withdrawal request along with a self-declaration stating the purpose for the withdrawal. This submission has to be done to the central record-keeping agency (CRA) through the government nodal office or point of presence. In the case a subscriber suffering from any illness specified in the master circular is unable to submit the form because of the illness, the withdrawal request can be submitted by any family member.

Once an NPS subscriber applies for a partial withdrawal, the CRA starts processing the withdrawal request.


NPS partial withdrawal: What will be the tax implication?

“Partial withdrawal is tax-exempt,” says Abhishek Kumar, a SEBI registered investment advisor (RIA) and Founder of SahajMoney.

Should you partially withdraw from NPS or avoid it?

The NPS is structured to maximise retirement savings through compound growth and offers tax benefits, making it an essential component of retirement planning. Deciding whether to withdraw 25% from your NPS account requires a nuanced evaluation of your immediate financial needs against the long-term objective of securing a stable retirement, says Karkera.

“While the scheme permits withdrawals for significant life events, such as education, marriage, medical emergencies or home purchase, it is crucial to remember that the primary aim of NPS is to provide financial security during retirement. Therefore, unless faced with an urgent financial necessity or an investment opportunity with a potentially higher return (and you’re comfortable with the associated risks), maintaining your NPS corpus intact is generally advisable. This approach ensures that you benefit from the scheme’s long-term growth potential, securing a more financially stable retirement,” he adds.

There is a way to avoid withdrawing from the NPS account till maturity and take care of sudden expenses, says experts. “Build a separate emergency corpus and buy adequate health insurance to avoid partial withdrawal from NPS corpus as doing so would impact the retirement corpus,” adds Kumar.

William Murphy

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