This post has already been read 40 times!
NPS Rules for Partial and Complete Withdrawal (Tier I & II) — 2025
A comprehensive, practical and up-to-date guide for subscribers: eligibility, partial and premature withdrawals, retirement options, taxation, procedural steps, examples, annuity choices, comparisons, mistakes to avoid and a plain-language conclusion.
What is the National Pension System (NPS)?
The National Pension System (NPS) is a regulated, voluntary long-term retirement savings scheme designed to help individuals accumulate a retirement corpus through disciplined contributions and market-linked returns. It is governed by the pension regulator and provides a structure for investing in a diversified mix of equities, corporate bonds and government securities to grow savings over time.
NPS is built around two account types — Tier I (the primary, retirement-oriented account with tax benefits and withdrawal restrictions) and Tier II (a flexible, voluntary account with liquidity but fewer tax benefits). This guide focuses on withdrawal rules for both accounts so you can plan realistically for retirement or emergency needs.
Tier I vs Tier II — core differences
| Feature | Tier I | Tier II |
|---|---|---|
| Primary purpose | Retirement savings with tax incentives | Voluntary savings; fully flexible |
| Who can open | All Indian citizens aged 18–70 | Only if subscriber has Tier I |
| Minimum contribution | ₹1,000 annually (to keep account active) | No minimum for general subscribers |
| Withdrawal rules | Restricted — partial withdrawals allowed after 3 years; major rules at retirement or exit | Flexible — withdraw anytime (subject to any employer-specific lock-in) |
| Tax benefits | Eligible for deductions under sections 80CCD(1), 80CCD(1B), 80CCD(2) as applicable | No regular tax benefit for most subscribers (some government employees may get exemptions with lock-in) |
| Tax on withdrawal | Partial withdrawals (allowed reasons) and some lumpsums tax-free; annuity income taxable | Taxable as per applicable slab (unless locked in with tax benefit) |
Practical point: Treat Tier I as your retirement backbone and Tier II as a flexible riding reserve — useful for liquidity needs, but without the same tax advantages.
Partial Withdrawal Rules — Tier I (what you must know)
Partial withdrawal from Tier I is permitted but only under specific conditions. These provisions let you access a portion of your contributions for life events or emergencies while keeping the long-term retirement focus intact.
Key rules for partial withdrawal
- Eligibility: Account must be active for at least 3 years.
- Amount limit: Up to 25% of your own contributions (this excludes employer contributions and investment returns) per withdrawal event.
- Frequency: Maximum 3 partial withdrawals during lifetime; generally a minimum gap of 5 years between withdrawals, except in specified medical emergencies.
- Permitted reasons: Education of dependent children, marriage of dependent children, purchase/construction of residential house (first house only), treatment of critical illnesses or long-term disability, skill development / starting a business.
- Tax treatment: These partial withdrawals (for eligible purposes) are currently treated as tax-exempt.
Important: The calculation base is your own contributions (not the entire corpus); and prior withdrawals impact future available amounts — always check your contribution ledger before applying.
Tier II (contrast)
Tier II is effectively liquid. There are no restrictions on withdrawals for most subscribers — you can withdraw any amount anytime. The caveat is that Tier II withdrawals are generally taxable as income (unless you had a special locked-in Tier II with tax concessions available to some government employees).
Complete Withdrawal at Retirement / Superannuation
At retirement (commonly age 60), the NPS withdrawal rules balance lump-sum freedom with the objective of ensuring a steady pension:
Main elements at age 60
- Lump sum: Up to 60% of your accumulated Tier I corpus can be withdrawn as a one-time lump sum. This portion is typically tax-exempt.
- Annuity requirement: At least 40% of the corpus must be used to purchase an annuity (a pension product) from an approved annuity service provider. The annuity income received subsequently is taxable as per your slab.
- Small corpus exception: If the total Tier I corpus at retirement is below a threshold (for example, ₹5 lakh), you may be allowed to withdraw 100% as lump sum without buying annuity.
- Deferment window: You are not obliged to exit exactly at 60 — you can continue investing in NPS up to a higher permitted age (e.g., up to 75 in many schemes), and choose when to take your lumpsum and purchase annuity between 60 and that deferral age.
Practical note: The annuity portion provides a lifetime income but is taxable; the lumpsum gives immediate liquidity and can be used to clear liabilities, invest or meet immediate needs. Structuring both judiciously is important for long-term retirement income planning.
Premature Exit (before age 60)
Life can change — jobs, migration, financial priorities. The NPS provides an exit route before 60 under rules intended to preserve retirement focus while giving some access to accumulated funds.
Core points for premature exit
- Minimum tenure: Premature exit is typically available after completing a minimum active subscription period (commonly 5 years).
- Withdrawal split: On exit after the required tenure you may generally withdraw up to 20% of the corpus as lump sum. The balance (commonly 80%) needs to be used to buy an annuity.
- Very small corpus: If the total corpus is below a lower threshold (for example, ₹2.5 lakh), some schemes permit a 100% lump-sum withdrawal — no annuity purchase required.
- Tax impact: Lump-sum portions specified by scheme rules are typically tax-exempt; annuity payments are taxable when received.
Example: If your premature-exit corpus is ₹10 lakh and you have completed the minimum tenure, you might be able to take ₹2 lakh (20%) as a lumpsum and use ₹8 lakh to buy an annuity that will pay a periodic pension.
Withdrawal Process — Online & Offline (step-by-step)
Whether you’re applying for a partial withdrawal, retiring, or exiting prematurely, the procedural steps are largely the same. Prepare documents in advance to avoid delays.
- Check eligibility: Verify your PRAN account tenure and the specific withdrawal conditions applicable to your case (partial vs premature vs retirement).
- Gather documents: PRAN, Aadhaar, PAN, bank proof (cancelled cheque), passport-size photo, withdrawal/exit form, proof of purpose (e.g., admission letter, medical bills) where required.
- Login to CRA portal: Use your PRAN and password on the CRA/NSDL/KFintech portal. Navigate to the transact/withdrawal section and fill the online request (if online facility is available).
- Penny-drop bank verification: The CRA may perform a small deposit verification to confirm bank details before releasing funds — ensure the registered bank account details are correct.
- Submit signed form: Even if initiated online, you may need to print, sign and submit the withdrawal form with documents to your PoP-SP (Point of Presence — service provider) or the Nodal office for authentication.
- Verification & processing: The PoP/Nodal office verifies documents and authorizes the request. After verification the CRA processes the payment. Typical timelines: Tier II (faster ~ 3 working days), Tier I (10–15 working days depending on verification and annuity processing).
- Annuity purchase (if applicable): For the portion that must be annuitized, choose an annuity provider and plan. The CRA/portal usually provides a comparison tool to view provider quotes and options.
- Funds credited: Lump sum to your registered bank account; annuity from the insurer commences per its schedule.
Taxation — Clear rules and practical examples
Tax is often the surprising element in withdrawal planning. Here are clear rules and examples so you can plan without surprises.
| Withdrawal Event | Tier I Tax Treatment | Tier II Tax Treatment |
|---|---|---|
| Partial withdrawal (approved reasons) | Generally tax-exempt | Taxable as income (no special exemption) |
| Retirement lumpsum (up to 60%) | Tax-exempt (subject to scheme thresholds) | Not applicable (Tier II fully withdrawable; taxable) |
| Premature exit lumpsum (20% typical) | May be tax-exempt as per rules | Taxable |
| Annuity income | Taxable as salary/pension income when paid | Not applicable |
| Death payout to nominee | Generally tax-exempt for nominees | Taxable depending on circumstances |
Illustrative examples
Note: Tax rules can be impacted by changes in tax law and government notifications. It is wise to review the latest tax circulars or consult a tax professional before finalizing withdrawal choices.
Annuity Providers & How to Choose an Annuity
When part of your NPS corpus must be converted into an annuity, you select a licensed annuity provider whose product will pay you a periodic pension for life or for a guaranteed period.
Common annuity variants
- Immediate level annuity: Fixed pension for life.
- Joint-life annuity: Pension for subscriber and spouse (on death, continues to spouse).
- Guaranteed period annuity: Pension for life, with a guaranteed minimum term (e.g., 5/10 years) — if subscriber dies within term, nominee receives balance payments.
- Annuity with return of purchase price: On death, the purchase price (or balance) is returned to nominee.
- Inflation-linked annuity: Pension that increases periodically to counter inflation (may produce lower initial pension).
How to choose
- Compare annuity rates across providers for your age and corpus amount.
- Assess the insurer’s credit strength and claim-paying record.
- Decide whether you prefer a higher immediate pension or protection for dependents (joint life or return-of-premium).
- Consider whether inflation protection is needed (balances current vs future purchasing power).
Tip: Use the CRA/portal annuity comparison calculator to get quotes from multiple providers for the same corpus amount. This helps you pick the best yield for your circumstances.
Comparison: NPS vs EPF vs PPF
A short comparison focused on withdrawal features and taxation helps align your retirement mix.
| Feature | NPS (Tier I) | EPF | PPF |
|---|---|---|---|
| Primary objective | Market-linked retirement savings | Employee retirement savings (salary-linked) | Long-term government-backed savings |
| Liquidity | Restricted; partial withdrawals allowed after 3 years (specific reasons) | Partial withdrawals after defined conditions; full at retirement or leaving service | Lock-in 15 years (partial withdrawals allowed after year 5) |
| Taxation on withdrawal | Partial and some lumpsums tax-free; annuity taxable | Tax-free if service > 5 years | Fully tax-exempt at all stages |
| Return type | Market-linked (equity exposure possible) | Government-declared interest | Government-declared interest |
In short: NPS provides equity exposure and potential higher long-term returns but involves annuitization and partial lock-ins; EPF is stable and tax-friendly for salaried employees; PPF is safest with EEE tax treatment but long lock-in.
Common Mistakes & How to Avoid Them
- Not verifying KYC and bank details: Mismatches delay payments. Update Aadhaar, PAN and bank info well before applying.
- Misunderstanding tax treatment: Assuming all NPS withdrawals are tax-free. Know which portions are taxable (annuity income, Tier II withdrawals, etc.).
- Wrong annuity selection: Picking the highest initial payout without factoring longevity, inflation, and spouse protection can be short-sighted.
- Ignoring partial withdrawal limits: Attempting to withdraw beyond 25% of own contributions or exceeding the allowed number of partial withdrawals will get claims rejected.
- Not updating nominee details: Failing to update nominee information creates complications for heirs.
- Rushing to exit: Premature exits may reduce long-term retirement income. Evaluate alternative liquidity options (Tier II, loans, other investments) before surrendering NPS benefits.
Simple habit to avoid many issues: once per year, log into your CRA account, verify KYC and bank account details, review contribution history and confirm nominee details.
Frequently Asked Questions (FAQs)
Conclusion — Practical takeaways
National Pension System is a powerful retirement instrument that blends disciplined saving with market-linked growth. Tier I protects the retirement objective through conditional withdrawals and annuity requirements, while Tier II offers liquidity. To make NPS work for you:
- Plan your long-term retirement mix: use Tier I primarily for retirement and Tier II for liquidity.
- Understand partial withdrawal rules (3-year eligibility, up to 25% of own contributions, max 3 withdrawals) so you don’t unintentionally exhaust options.
- At retirement, thoughtfully split between the tax-free lumpsum and annuity — balance immediate needs and lifetime income security.
- Shop annuities and choose a plan that matches your spouse/legacy needs and inflation expectations.
- Keep documentation and KYC updated to avoid delays, maintain nominee details, and get professional tax advice when needed.
If you are a CMA student or a finance professional, treat NPS as a practical example of product design balancing liquidity, tax incentives and behavioral nudges for long-term savings. For personal decisions, model outcomes (lumpsum vs annuity) and consider longevity, health and dependency factors.
Disclaimer
This article is intended to provide general information about NPS withdrawal rules in plain language. It does not constitute legal, tax or financial advice. Rules, thresholds, and tax treatments can change through government notifications and regulatory updates. Before making any NPS withdrawal, annuity purchase or tax-related decisions, please verify the current rules on official portals and consider consulting a qualified tax or financial advisor. CMA Knowledge and the author accept no liability for actions taken based on this content.
