The National Pension System (NPS) is one of the most popular retirement savings schemes in India, known for its long-term benefits, flexibility, and tax advantages. While NPS encourages regular contributions to ensure a secure retirement, it also offers the option of partial withdrawals during the investment period under certain circumstances. In this blog, we will explore the tax implications of partial NPS withdrawals, including eligibility, tax exemption benefits, and how to navigate these provisions to maximize your benefits.
What is Partial NPS Withdrawal?
NPS allows investors to make partial withdrawals from their corpus before the age of 60 for specific reasons. These withdrawals can be made for purposes such as:
Education of children or spouse
Medical treatment for self or family
Purchase or construction of a house
Marriage of children or self
High-order medical conditions (e.g., critical illnesses)
The maximum amount that can be withdrawn partially is up to 25% of the contributions made by the subscriber, excluding the employer's contribution (if applicable), and subject to specific conditions. Importantly, the withdrawal must not exceed the actual balance in the NPS account at the time of withdrawal.
Taxation on Partial NPS Withdrawal
The tax treatment of partial NPS withdrawals depends on the purpose for which the withdrawal is being made. The good news is that NPS offers significant tax exemptions for partial withdrawals under specific conditions.
1. Tax Exemption on Partial NPS Withdrawal
Under the Income Tax Act, partial withdrawals from NPS are tax-exempt, provided they meet the following conditions:
Withdrawal for specific purposes: The withdrawal is made for reasons such as education, medical treatment, marriage, or the purchase of a house, as mentioned earlier. These are considered as “specified purposes” under the Income Tax provisions.
Conditions of age and tenure: The partial withdrawal is allowed only after the NPS account has been active for at least 3 years. Therefore, you cannot make a tax-exempt withdrawal before completing 3 years of contributions to your NPS account.
2. Tax Treatment on Amount Withdrawn
The amount withdrawn under the partial NPS withdrawal scheme is exempt from tax, which means you will not have to pay any tax on the partial amount that is withdrawn for any of the specified purposes. This makes NPS a great tool for long-term retirement planning while also offering flexibility in times of need.
Example 1:
Scenario: You have an NPS corpus of ₹5,00,000, and you want to make a partial withdrawal of ₹1,00,000 for your child’s education.
Tax Treatment: The ₹1,00,000 withdrawn for education will be tax-exempt as it qualifies under the specified purpose of education.
Example 2:
Scenario: After 3 years of contributing to NPS, you want to withdraw ₹1,00,000 to fund medical treatment for a critical illness.
Tax Treatment: The ₹1,00,000 withdrawn for medical treatment will be tax-exempt, subject to the specified conditions of the withdrawal.
3. Contribution Breakdown for Withdrawal
It is important to note that only the subscriber’s contribution to the NPS is eligible for a partial tax-exempt withdrawal. The amount contributed by the employer is not included in this withdrawal, and if the employer has made contributions, you will not be able to withdraw that portion partially without triggering tax implications.
What Happens After 60: Full NPS Withdrawal
Once you reach the age of 60, you have the option to withdraw your entire NPS corpus or convert it into an annuity. However, this entire withdrawal is subject to taxation as per the following rules:
Tax on Lump-Sum Withdrawal: The lump-sum portion that you withdraw at the time of retirement is subject to taxation in the year of withdrawal. However, only the subscriber’s contribution to the corpus is taxed at the time of full withdrawal, and the portion contributed by the employer is not taxed.
Tax on Annuity: The annuity income you receive after retirement is taxable as per your applicable income tax slab.
Partial NPS Withdrawal: Tax Exemption for Specific Circumstances
A. Partial Withdrawal for Medical Treatment
If you are withdrawing funds from your NPS account for medical treatment, including the treatment of serious illnesses such as cancer or organ transplant, it qualifies as a tax-exempt reason under the NPS scheme. No tax will be deducted on the amount withdrawn if the purpose is medically justified.
B. Partial Withdrawal for Child’s Education
Many people use NPS funds for the higher education of their children. When withdrawing partial funds for education, the purpose is eligible for tax exemption, provided the criteria of the NPS rules are met.
C. Partial Withdrawal for Housing
If you are purchasing or constructing a house, you are eligible for a tax-exempt partial withdrawal under the NPS scheme, provided the criteria are satisfied (like the number of years since account opening and the amount withdrawn). This makes NPS a great option for housing-related expenses in the long run.
D. Partial Withdrawal for Marriage
NPS allows partial withdrawals for marriage-related expenses. You can withdraw up to 25% of your contributions if the money is used for the marriage of children or your own marriage. This is one of the significant advantages that NPS offers.
How to Make Partial Withdrawals from NPS?
To make a partial withdrawal from your NPS account, follow these steps:
Eligibility Check: Ensure that you have completed at least 3 years of contributions to your NPS account, as this is the minimum requirement for making a partial withdrawal.
Submit a Request: Request a partial withdrawal online through the NPS portal or via your Point of Presence (PoP). You may need to fill out the required forms and submit necessary documentation (e.g., medical certificates, education bills, marriage certificates, etc.).
Amount Withdrawal: The NPS system will verify your request and process the withdrawal. The amount withdrawn will be credited to your registered bank account.
Key Points to Remember
Eligibility Criteria: You can only make partial withdrawals after 3 years of continuous contributions.
Tax Exemption: Partial withdrawals for education, medical treatment, marriage, or housing are tax-exempt.
Contribution Breakdown: Only the subscriber’s contributions can be partially withdrawn; employer contributions are excluded.
Maximum Withdrawal: You can withdraw up to 25% of your contributions in your NPS account.
Conclusion
Partial withdrawals from the National Pension System (NPS) offer a great deal of flexibility, especially in times of need. While NPS is designed as a long-term retirement savings scheme, it does provide significant tax benefits, allowing tax-exempt withdrawals for specific purposes like education, medical treatment, marriage, and housing. By understanding these provisions, you can make the most of your NPS account while minimizing your tax liability.
If you're considering partial withdrawals, always check the eligibility criteria, ensure the withdrawal is for a specified purpose, and keep track of your contribution breakdown to avoid any confusion or tax implications.
For any further questions or detailed guidance, it's always a good idea to consult with a financial advisor who can help you navigate the rules specific to your situation.
Comments