NPS exit rules: When you can withdraw money from pension account before 60 years of age

The National Pension System (NPS) is a scheme aimed at providing pension after the retirement age, i.e., 60 years. An individual can invest a minimum amount of Rs 1,000 in a financial year (FY) with no limit on the maximum amount. There are two types of NPS accounts: Tier I and Tier II. Tier I is mandatory retirement account if you wish to invest in NPS, whereas Tier II is a voluntary saving account associated with your PRAN. "Tier II offers greater flexibility in terms of withdrawal, unlike Tier I account, you can withdraw from your Tier II account at any point of time," according to the NPS FAQs on the NSDL website.

However, government employees can claim deduction under section 80C of the Income-tax Act, 1961 for Tier-II account. Do note that if a deduction is claimed then the account will have lock-in of three years.

Indeevar Krishna, Chief Process Officer and Business Head, CAMS CRA, a PFRDA authorised record-keeping agency says, "Investments made into NPS are often mistaken not to be accessible until exit i.e., till the age of retirement of 60 years. However, the pension scheme allows partial withdrawal for specific reasons. These include - higher education of self, spouse or children, marriage of children etc."


Here is a look at when can an NPS investor withdraw money from NPS partially and fully.

Partial withdrawal from NPS
As per the NPS scheme rules, partial withdrawal of money from Tier I account can be made for the following reasons:

• Higher education of self, spouse or children
• Marriage of children including legally adopted children
• Purchase/construction of house/flat in his/her name or jointly with spouse
• For treatment of specified illness of self, spouse, children, dependent parents. Do note that treatment should lead to hospitalisation
• To meet medical and incidental expenses arising out of disability or incapacitation suffered by the subscriber
• For meeting subscriber's expenses towards skill development/re-skilling or any other self-development activities as permitted by PFRDA
• To meet expenses related to establishment of start-up or any other own venture, as permitted by PFRDA.

Other conditions of partial withdrawals
It is important to note that there are other conditions that must be met apart from those mentioned above. Krishna says, "Partial withdrawal facility is available to NPS investor provided the Tier- I NPS account has completed three years from the date of joining. Further, the maximum amount that can be partially withdrawn from the NPS account cannot exceed 25% of the individual's own contribution. The partial withdrawal can be done maximum 3 times during the tenure of the NPS account."

Complete exit from NPS
If an employee wants to exit from the NPS scheme, then there are three situations when an individual can completely exit from the NPS account and close his/her account.

Conditions when pre-mature exit is allowed

• Pre-mature exit after mandatory lock-in period

Before attaining the age of 60 years, an individual can close his/her account. However, the closure of NPS account depends on whether an individual is self-employed or a salaried individual.

The Pension Fund Regulatory and Development Authority (PFRDA) has reduced the lock-in period to 5 years from 10 years earlier. In a notification dated December 28, 2021, PFRDA stated that an individual can voluntary close his/her NPS account after completion of 5 years from date of joining, provided there is no employer-employee relationship. This lower lock-in period is applicable for self-employed individuals, fixed-term employees, consultants who have left their previous employer.

If you are a salaried individual, then lock-in period of 10 years will be applicable. Once the 10 years is completed, individuals can voluntarily exit from the NPS scheme.

Krishna says, "If an individual decides to completely exit from NPS, then at least 80% of the accumulated corpus has to be mandatorily utilised for buying an annuity and remaining 20% will be paid as lump sum. However, if the accumulated corpus does not exceed Rs 2.5 lakh, then accumulated corpus can be withdrawn as lump sum."

• Death of subscriber before the age of 60 years

If the NPS subscriber passes away before the age of 60 years, then the accumulated corpus will be paid to the nominee/legal heir. Krishna says, "Access to the accumulated corpus varies between Government sector and All Citizen category subscribers. For govt employee subscriber, minimum of 80% of accumulated corpus has to be used towards purchase of annuity and balance is available for lump sum withdrawal by the legal heir/nominee. Nominee/legal heir shall have option to withdraw 100% corpus if corpus does not exceed Rs 5 Lakh. For non-government employees, 100% corpus will be paid to nominee(s)/ legal heir(s) and the nominee will have an option to purchase annuity."

• Superannuation or till age of 60 years, whichever is earlier

When a subscriber reaches the age of 60 years or superannuation, he/she has three options - withdrawal, continuation of NPS account and deferment of withdrawal.

a. If an individual opts for withdrawal: An individual can withdraw at least 40% of accumulated corpus to purchase an annuity that would provide a regular monthly pension. The 60% remaining funds can be withdrawn as lump sum. Do note that the lump sum amount withdrawn will be tax-exempt in the hands of an individual.

b. If an individual opts for continuation of NPS account: Subscriber can continue to contribute to NPS account beyond the age of 60 years/superannuation till the age of 75 years. The subscriber can withdraw at any time from his/her NPS account during the extended period. Krishna says, "Deferment of withdrawal is not available to an NPS subscriber if he/she has opted to continue to contribute after the age of 60 years." This is because there is no need for deferment as the investor can exit from NPS anytime during extended period by exercising the option of withdrawal and mandatory purchase of annuity.

c. If an individual opts for deferment of withdrawal: Subscriber can defer withdrawal and stay invested in NPS up to 75 years of age. Subscriber has the following options:
i. Defer lump sum Withdrawal
ii. Defer only Annuity
iii. Defer both lump sum as well as Annuity.

If a subscriber chooses to defer, he/she will not be allowed to make contributions to their NPS account.