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NPS partial withdrawal rules and how it is taxed

The National Pension System (NPS) is aimed at providing pension for individuals at the time of retirement which usually starts from the age of 60 years. However, at times you may need to withdraw money from it for your medical emergencies or similar contingencies.

Read on to know the rules of partial withdrawal from NPS Tier-1 account and how it is taxed.

NPS offers two types of accounts for an individual - Tier-I and Tier -II. To invest in NPS, it is mandatory to open a Tier-1 account. There are certain rules which must be satisfied to be able to make partial withdrawals from a Tier-1 account.

On the other hand, a Tier-II account can be opened only after the subscriber has opened a Tier-I account. There are no restrictions on withdrawals from a Tier-II account.

When is partial withdrawal from NPS allowed?
There are certain conditions which must be satisfied to make a partial withdrawal from your NPS account. Puneet Gupta, Director, EY India says, "There are certain conditions that the individual must fulfil to make partial withdrawals from a Tier-I account. However, there are no conditions attached for making such withdrawals from a Tier-II account. Remember, government employees who are claiming deduction under section 80C of the Income Tax Act on the Tier-II account will not have that flexibility to withdraw money from the Tier-II account before 3 years if they have claimed the deduction."

Alok Agrawal, Partner, Deloitte India says, "Partial withdrawal from Tier-1 account of NPS is allowed only in specified situations." These situations are as follows:
a) For the purpose of higher education of his/her children
b) For marriage of his/her children
c) For purchase or construction of residential house or flat
d) For treatment of specified illness such as Cancer, Kidney 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 Accident of serious/life threatening nature.
e) For meeting expenses of skill development/re-skilling or any other self-development activities.
f) For establishing his/her own venture or any start-up.

Gupta further adds, "Individual can also make partial withdrawal for meeting medical and incidental expenses arising out of disability or incapacitation suffered by him/her. However, individuals must remember that the partial withdrawal from Tier-I NPS account is allowed only in the situations specified. No partial withdrawal will be allowed from the NPS account in any other situations."

Additional condition for partial withdrawals
Apart from the above mentioned conditions for making partial withdrawals, there is another condition which must be satisfied. Agrawal says, "Partial withdrawal in the specified situations is allowed only if the subscriber has completed at least three years from the date of joining of the NPS, i.e., the account is at least three years old. However, the three-year rule is not applicable if the partial withdrawal is to be made for the purpose of meeting expenses towards skill development, re-skilling or any other self-development activities."

How much money can you withdraw?
There is a limit on the amount of money that can be withdrawn from your NPS Tier-I account in a partial withdrawal situation. Gupta says, "There is a limit on the amount of money that can be partially withdrawn from the Tier-I account of the NPS. According to the current rules, a subscriber can withdraw up to 25 per cent of his/her own contribution. On the other hand, there is no such limit on partial withdrawal of money from a Tier-II account. The limit (25 per cent of the individual's own contribution standing to his/her credit in the NPS account on the date of application for withdrawal) remains same for every specified situation where the withdrawal is allowed."

Agrawal further adds, "The maximum amount that can be withdrawn from the NPS account cannot exceed 25 per cent of the contribution made by the subscriber, i.e., you. Therefore, if both you and your employer are jointly contributing to your NPS account, then the maximum amount that can be withdrawn from your account will be calculated on the basis of the contributions made by you only."

Remember that additional tax benefit is available under section 80CCD(2) for the contribution made by the employer.

Limit on the number of withdrawals
Apart from the conditions specified, there is also restriction on the number of times such partial withdrawals can be made from your Tier-I NPS account. Gupta says, "According to NPS rules, such partial withdrawals are allowed only three times during the entire tenure of the NPS account subscription, i.e., from the date of joining till the age of 60 years. No further partial withdrawals will be allowed, once the individual has made three withdrawals."

Taxation of partial withdrawal from NPS
According to current income tax laws, maximum 25 per cent of withdrawal from the subscriber's own contribution will be exempted from tax. Agrawal adds, "Individual can withdraw up to 25 per cent from his/her own contribution from the Tier-I NPS account. Also, as per current income tax laws, a maximum of 25 per cent of an individual's own contribution to NPS Tier I account can be claimed as tax exempt when taken out as partial withdrawal. Therefore, the maximum amount that the individual can withdraw partially and the amount exempted are equal."

However, he further adds, "NPS Tier-I is a retirement account, which is the primary NPS account and an individual can open NPS Tier-II only after opening a Tier-I account. NPS Tier-II is a non-retirement NPS account. For Government employees (as per Budget 2019), contributions by the individual to the NPS Tier-II account will be eligible for tax deduction under Section 80C up to Rs 1.5 lakh per annum and there would be a lock-in period of 3 years. For individuals (other than Government employees), there is no lock-in for NPS Tier-II and one can withdraw at any time from the NPS Tier-II account. For such individuals (unlike Government employees), there is no tax deduction available under Section 80C. The returns on NPS Tier 2 account contributions are taxable at slab rates as applicable to the individuals."
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