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Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

Partial withdrawal of contributions from the National Pension System

Only those NPS subscribers who have completed 3 years in the system would be eligible to apply for partial withdrawals

The Pension Fund Regulatory and Development Authority (PFRDA) has modified the guidelines for partial withdrawals for the subscribers of the National Pension System (NPS). These guidelines were issued in August 2017 (read them here). These guidelines specified the terms and conditions, purpose, frequency and limits for partial withdrawals from NPS. Only those NPS subscribers who have completed 3 years in the system would be eligible to apply for partial withdrawals. Earlier, the partial withdrawals were allowed after 10 years of joining NPS. 

Further, these guidelines are applicable to the accumulated contributions of NPS subscribers. The employer contributions to an NPS account, if any, are not considered for these partial withdrawals. Moreover, the subscriber will be allowed to make a partial withdrawal of only up to 25% of the contributions—as on the date when application for partial withdrawal was made. A subscriber will be allowed only three partial withdrawals during the entire tenure of NPS subscription. 

Partial withdrawals have been allowed for education or marriage of children—including legally adopted children. Partial withdrawals are also allowed for purchase or construction of a residential property in the name of the subscriber or in joint ownership with the subscriber’s legal spouse. If the subscriber already owns a house, either individually or jointly—other than an ancestral property—withdrawal for buying a house would not be permitted. 

The guidelines have also detailed 14 specific medical conditions where partial withdrawal can be allowed. It is also allowed if the spouse, children or dependent parents suffer from these specified conditions. These conditions include: 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, and an accident of life-threatening nature. The regulator can modify and add to this list. 

NPS subscribers have to fill the withdrawal form and submit it to a point-of-presence (PoP). PoPs, which include most big banks, are NPS distributors. In the form, state what percentage of the contributions you want to withdraw, the purpose, and include some proof to support your request. The PoP is responsible for ensuring that the request is genuine and your bank account details are correct. Once satisfied, it will send your form to the central record-keeping agency (CRA) of NPS for processing the payment. 

The Union Budget 2017-18 had proposed that partial withdrawals of up to 25% of the contributions will not be taxed. This is in addition to the exemption of 40% of the corpus at the time of withdrawal. However, this will come into effect from April 2018, and thus will be applicable for the assessment year 2018-19.  

At present, NPS has a tax treatment of exempt, exempt, tax (EET). This means that your money at the stages of contribution and accumulation is exempt from tax but at the time of withdrawal, you need to pay tax on it. As your corpus—principal plus returns—is taxed at the time of withdrawal, your returns from such instruments will come down, depending on your tax slab. 

The government had, earlier, made withdrawals from the NPS tax exempt if the subscribers withdrew up to 40% of the corpus at maturity, which is when the subscriber reaches 60 years of age. As NPS is a market-linked annuity product, up to 60% of the maturity corpus can be withdrawn as lump sum on maturity, at age 60, and the remaining amount has to be converted into an annuity.

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