The Updated NPS Withdrawal Rules February 1, 2024 : Comprehensive Criteria and Revised Tax System

NPS withdrawal rules have now changed. A whole new set of criteria was announced and the tax system was updated.

The National Pension System (NPS), the backbone of India’s retirement planning, has introduced new rules regarding partial withdrawals. Effective from February 1, 2024, these changes are designed to provide greater flexibility to consumers and keep the primary objective of NPS – building a substantial retirement fund – intact.

Understanding New Partial Withdrawal Rules-

Eligibility and Limitation: NPS members are now eligible for partial withdrawal after three years of opening the account, focusing on their own contribution. Importantly, withdrawals are limited to 25% of members’ contributions. The employer’s contribution and the income generated on the total corpus are excluded from this calculation.

Example for clarity: If you have invested ₹4 lakh in NPS and your total fund reaches ₹10 lakh, then you are eligible to withdraw up to ₹1 lakh, which represents 25% of your contribution.

• Higher education or marriage of children (including legally adopted children)
• Purchase or construction of a first home
• Treatment of specified diseases
• Medical expenses due to disability or incapacity
• Skill Development or Self-Development Activities
• Setting up of enterprises or startups

Notably, withdrawals for buying or building a house are now restricted to those who do not already own a house.

Frequency and conditions for withdrawal

Members are allowed three partial withdrawals during the tenure of their NPS account, with a mandatory gap of five years between each withdrawal. This gap requirement is waived for withdrawals related to certain illnesses.

Partial withdrawal

Members are required to submit a withdrawal request and self-declaration of the purpose of withdrawal to the Central Record-keeping Agency (CRA) through proper channels. In case of illness, a family member can submit a request on behalf of the member.

Tax implications

Partial withdrawals from NPS are tax-deductible, offering additional benefits to members considering this option.

To withdraw or not to withdraw?

While the NPS allows partial withdrawals under certain circumstances, experts advise caution. The primary purpose of NPS is to achieve financial stability after retirement. Unless there is an urgent need or a high-return investment opportunity is encountered, it is advisable to keep the corpus intact to take advantage of compounding growth and tax benefits.

Experts suggest building a separate emergency fund to cover unexpected expenses and investing in adequate health insurance, thus saving NPS corpus for retirement.