NPS Withdrawal Rules Explained: Tax Benefits, Exit Options & Annuity Plans

The National Pension System (NPS) is a popular long-term retirement savings option offering flexibility, tax benefits, and a structured withdrawal mechanism. While NPS provides consistent growth during the investment phase, understanding the withdrawal rules is crucial to maximizing the benefits of your retirement corpus.

In this blog, we cover five key aspects of NPS withdrawals:

1. Withdrawals on Maturity (Normal Exit at Age 60)

When you retire at 60, you can exit the NPS and withdraw a part of your corpus. Here are the options:

● Default Rule:

○ 60% of the corpus can be withdrawn tax-free as a lump sum.

○ 40% must be used to purchase an annuity plan, which provides a regular pension.

● If Corpus ≤ ₹5 lakh:
You can withdraw the entire amount without purchasing an annuity.

● Continue NPS Till 75:
You can choose to contribute until age 75 and continue enjoying the tax benefits.

● Defer Withdrawals:
You can delay withdrawing the lump sum or annuity by up to 3 years.

● Auto Extension:
If no action is taken at 60, the NPS account automatically extends till age 75.

● Phased Withdrawal:
You may withdraw the lump sum portion in installments instead of one go.

2. Partial Withdrawals (Before Retirement)

Partial withdrawals are allowed in specific situations to help during emergencies:

● When? After 3 years of account opening.

● How much? Up to 25% of the self-contributed amount.

● How many times? Maximum of 3 partial withdrawals during the NPS tenure.

● Purpose: Funds can be withdrawn for specific purposes:

● Tax Benefit: These withdrawals are tax-exempt.

3. Withdrawals on Premature Exit (Before Age 60)

If you exit NPS before the age of 60, the rules differ slightly:

● If Corpus > ₹2.5 lakh:

○ 80% must be used to purchase annuity.

○ 20% can be withdrawn as a lump sum, and this amount is tax-exempt.

● If Corpus ≤ ₹2.5 lakh:
You can withdraw the entire amount without investing in an annuity and is tax-exempt.

4. Exit on Unfortunate Death of Subscriber

In case of the subscriber's death, the NPS account is handled as follows:

● Full Corpus Payable:
The entire accumulated amount is handed over to the nominee or legal heir and is tax-exempt.

● Annuity Option for Nominee:
The nominee may choose to invest in an annuity, but it is not mandatory.

● Nomination Rules:

○ You must nominate individuals when opening the account.

○ Up to 3 nominees can be added for both Tier I and Tier II accounts.

○ Specify the percentage of corpus allocation for each nominee.

5. Annuity Investment Options under NPS

The annuity portion of your NPS corpus provides you with a monthly pension. Here are the types of annuity plans you can choose from:

Tax Treatment: The annuity pension received under the NPS is treated as income and is taxable as per the subscriber’s applicable income tax slab in the respective year.

● Annuity for Life:
Pension stops after your death.

● Life Annuity with 100% to Spouse:
Pension continues for your spouse after your death and ends thereafter.

● Life Annuity with Return of Purchase Price:
Pension for life, and after your death, the purchase amount is returned to your nominee.

● Life Annuity with 100% to Spouse and Return of Purchase Price:
Pension continues for the spouse, and after both pass away, the original amount goes to the nominee.

● NPS Family Income Plan:
Pension continues to you, then your spouse, and then your parents. After all pass away, the amount is passed to your nominee or child.

Bonus Tip: No GST is applicable on the NPS corpus invested in an annuity plan, provided it is from a PFRDA-approved insurer.

PFRDA-approved Annuity Service Providers:

1. Life Insurance Corporation of India (LIC)

2. SBI Life Insurance Co. Ltd.

3. ICICI Prudential Life Insurance Co. Ltd.

4. HDFC Standard Life Insurance Co. Ltd.

5. Star Union Dai‑ichi Life Insurance Co. Ltd.

6. Bajaj Allianz Life Insurance Co. Ltd.

7. Edelweiss Tokio Life Insurance Co. Ltd.

8. IndiaFirst Life Insurance Co. Ltd.

9. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.

10. Kotak Mahindra Life Insurance Co. Ltd.

11. Max Life Insurance Co. Ltd.

12. Tata AIA Life Insurance Co. Ltd.

13. PNB MetLife India Insurance Co. Ltd.

14. Aditya Birla Sun Life Insurance Co. Ltd.

15. Shriram Life Insurance Co. Ltd.

Conclusion:

NPS not only helps build a retirement corpus but also ensures financial security through structured withdrawal and annuity options. By understanding these withdrawal rules, you can plan your retirement better and take advantage of all available tax benefits.

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