NPS Withdrawal Rules and Taxation Guidelines in 2020

NPS Withdrawal Rules and Taxation Guidelines in 2020-minNPS Withdrawal Rules and Taxation Guidelines in 2020


Creating a sufficient retirement corpus by the end of his/her service period is one of the major financial goals of an individual. National Pension Scheme is one such good effort taken by the Central Government of India to provide a sustainable solution to provide retirement income to all citizens of India. What is National Pension Scheme all about? What are the NPS Withdrawal rules and guidelines now in 2019-2020?

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What is NPS?


National Pension Scheme, also known as New Pension Scheme (NPS) is a voluntary and defined contribution-based contribution system regulated by PFRDA (Pension Fund Regulatory and Development Authority). In this scheme, you can invest in a corpus which is later reinvested in the diversified portfolios consisting of government bonds, corporate debentures, and shares. The returns in NPS are market-linked and hence the contribution would grow and accumulate over a period of time. Committed pension fund managers are assigned the task of managing the invested funds. The pension scheme provides a fixed income for a number of years after retirement.

What are Tier I and Tier II accounts and how they can be opened?


NPS offers two types of accounts- Tier I and Tier II account.

Tier I is a permanent non-withdrawable account whereas Tier II is a voluntary withdrawable account. One can open Tier II account only if he has opened Tier I account. Any citizen of India aging between 18 to 60 years can become an NPS subscriber. To open an NPS account, one needs to get the application form of NPS that can be obtained from any point of Presence Service Providers (POP-SP) or it can be downloaded from the website https://www.npscra.nsdl.co.in/. Fill in all the details along with attaching your address proof, photograph, and ID proof. Submit the duly filled and signed documents to the POPSP office long with the first minimum contribution. Once the documents are verified and processed, a Permanent Retirement Account Number (PRAN) is created and sent to the subscriber’s address.

To start investing in NPS, it is mandatory to open Tier I account. The minimum contribution in Tier I is Rs. 500. For Tier II account, the minimum contribution for opening an account is Rs. 1000. Tier II account is like a saving account. One is free to withdraw the money as and when required.

NPS Withdrawal Rules and Guidelines in 2019-2020 for Tier-1 A/c


Certain rules and regulations need to be fulfilled for withdrawing funds from Tier I account. However, there are no rules of withdrawal in Tier II account.  

Situations in which partial withdrawal is allowed:

1) For higher education of his/her children

2) For marriage of his/her children

3) For construction or purchase of residential house/flat

4) For a few specified illnesses like kidney failure, cancer, stroke, Heart valve surgery, paralysis, coma, serious accident of life-threatening nature, etc.

5) For meeting expenses of skill development, or other self-development activities

6) For starting his/her start-up or new venture

Individuals must keep in mind that partial withdrawal is allowed only in the above mentioned situations. No partial withdrawal is allowed in any other situation.

Minimum time limit before partial withdrawal


Partial withdrawal is allowed in the specified situations only if the subscriber has completed a minimum of three years from the date of joining of the NPS. 

Exception to this rule

The three-year rule is not applicable if the partial withdrawal is for skill development, re-skilling or other self-development activities.

Limit of partial withdrawal

There is a limit on the amount of partial withdrawal from the Tier I account. As per current rules, one can withdraw only 25% of his/her contribution. If you and your employer are jointly contributing to the Tier I account, then the maximum amount that can be withdrawn will be calculated based on the amount contributed only by you.

Taxation of partial withdrawal from NPS Tier I


The partial withdrawals are all tax-exempt.

Limit on the number of withdrawal

If the partial withdrawal is allowed for the Tier I account, it does not mean that you can withdraw the amount ‘n’ number of times. Partial withdrawals are allowed only three times in 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 are allowed after the individual has made three withdrawals.

NPS Tier I maturity proceeds

At the maturity of NPS i.e. at the age of 60, you are allowed to withdraw 60% of the total corpus amount. A minimum of 40% of the corpus has to be compulsorily invested in the annuity or pension plan. The 60% NPS withdrawal is fully tax-exempt.

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How NPS Tier II contributions are taxed?


NPS Tier I is a retirement account. NPS Tier II is a non-retirement account. According to the Budget of 2019, for the Government employees, contributions to the Tier II will be eligible for tax deduction under section 80C up to 1.5 lakh per annum and there would be a lock-in period of three years. For individuals other than government employees, there is no lock-in period of 3 years and they can withdraw at any time from the Tier II account.  For such individuals, there is no deduction of 80C available. The returns on NPS Tier II account are also taxed at applicable tax slab rates.        

Conclusion: NPS provides a systematic and excellent retirement solution to all the citizens of India. It helps you to meet your financial goals with ease. The Government has relaxed the rules of partial withdrawal to attract more and more funds to this scheme. Consider its pros and cons and then invest in NPS.

Suresh KP

NPS Withdrawal Rules and Taxation Guidelines in 2020

3 comments

  • Rajagopal

    So far there has been no clarity on taxation rules for the earnings from Tier II. First time you have made it clear that it will be taxed as per the current tax slab. Doesn’t it make Tier II less attractive? Instead, one can simply invest in MFs and claim LTCG.
    Or, one solution I could think of is that, as one wishes to withdraw from Tier II, he can simply transfer all the money from Tier II to Tier I first and then withdraw from Tier I. Not an ideal solution but a possibility. Your thoughts please.

    • Hello Rajagopal, NPS scheme is being attracted by many investors. Based on the benefits and risks in this scheme, if you are willing to go, you can always invest through Tier-II account for any extra amount. Once money deposited in Tier-1, there is no way you can withdraw except for few exceptions. How it is possible then?

      • Rajagopal

        One may transfer from Tier II to Tier I just before he reaches retirement age to save tax. Of course he has to consider 40% annuity. Like I said, it is not a very good solution suiting to everyone.
        If one wishes not to hold the amount in Tier II till retirement, then why invest in Tier II at all? Instead, is it not better to invest it in other MFs and claim LTCG benefits? That was my question.

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