Stox N Tax

Comprehensive Guide on NPS Exit Rules: How & When You Can Withdraw Your Corpus

The National Pension System (NPS) is one of the most popular retirement savings schemes in India, offering a disciplined way to build a retirement corpus with tax benefits. However, understanding when and how you can exit NPS and withdraw your corpus is crucial for subscribers to make the most of their investments. This article gives a detailed explanation of the NPS exit rules for different scenarios—government vs. non-government subscribers, premature exit, normal exit, unfortunate death, disability, and deferment options. We will also clarify important timelines such as the minimum lock-in periods and corpus thresholds for withdrawal without annuity obligation.

Understanding NPS Exit Scenarios

1. Premature Exit (Before 60 Years or Voluntary Retirement)

  • For both government and non-government subscribers, the earliest you can exit NPS prematurely is after 5 years of subscription.
  • However, there is an important distinction based on your total accumulated corpus:
    • If your total accumulated corpus at the time of exit is ₹2.5 lakh or less, you can withdraw 100% of the corpus as a lump sum without the obligation to purchase an annuity — but only after the NPS account has been active for at least 10 years.
    • If your corpus is more than ₹2.5 lakh, at least 80% of the accumulated corpus must be used to purchase an annuity that will pay you a monthly pension, and the remaining 20% can be withdrawn as a lump sum.

This means for small savers with less than or equal to ₹2.5 lakh corpus, complete withdrawal without buying an annuity is allowed only after 10 years of account opening, despite the 5-year minimum subscription period.

2. Normal Exit (At or After 60 Years / Superannuation)

  • Once you reach 60 years of age or your official superannuation age, you can exit NPS normally.
  • If your corpus is ₹5 lakh or less, you can withdraw 100% of the corpus as lump sum.
  • If your corpus is more than ₹5 lakh, you must use at least 40% of the corpus to buy an annuity, with the remaining 60% available as lump sum withdrawal.
  • The annuity then pays a monthly pension for life, providing you with steady retirement income.

3. Death Before Normal Exit (Before 60 Years or Superannuation)

  • In the unfortunate event of the subscriber’s death before normal exit:
    • If the corpus is ₹5 lakh or less, the entire amount can be withdrawn as lump sum by the nominee or legal heir, with an option for the nominee to purchase an annuity if desired.
    • If the corpus is more than ₹5 lakh, at least 80% must be used to purchase an annuity by the nominee or dependents, and the remaining 20% can be withdrawn as lump sum.
    • If no dependent family members (spouse, parents) survive, the annuity corpus is returned to surviving children or legal heirs.

Government vs. Non-Government Sector Differences

  • Government Sector Subscribers:
    Generally follow similar rules with a higher corpus threshold of ₹5 lakh for lump sum withdrawal without annuity obligation. Additionally, government employees can opt to continue NPS under the All Citizens Model by inter-sector shifting.
  • Non-Government Sector Subscribers:
    Follow the ₹2.5 lakh and ₹5 lakh corpus thresholds as explained above, with the mandatory minimum 5-year subscription lock-in before exit. They also have options to continue contributing up to age 75 or defer withdrawal.

Subscribers Who Join NPS After 60 Years

For those joining NPS post 60 years of age (mostly in the non-government sector):

  • Normal exit allowed after 3 years of subscription.
  • Corpus ₹5 lakh or less: 100% lump sum withdrawal allowed.
  • Corpus more than ₹5 lakh: at least 40% must be used to purchase annuity.
  • Exit before 3 years: at least 80% of corpus must be used for annuity purchase.
  • If the subscriber dies, the entire corpus goes to nominee, who may opt for annuity.

Exit & Withdrawal Due to Disability or In-Capacitation

  • If the subscriber is physically incapacitated or disabled (over 75% disability certified by government doctor) and cannot continue employment or contribution, the subscriber can exit NPS as if attaining superannuation.
  • Government sector subscribers discharged on account of disability are treated similarly as superannuation exits.

Continuation and Deferment Options in NPS

  • Subscribers can choose to continue contributing to NPS till age 75.
  • If not exited by 60 years or superannuation, accounts are automatically continued till 75.
  • Deferment options:
    • Defer lump sum withdrawal for up to 10 years.
    • Defer annuity commencement for up to 3 years.
    • Defer both lump sum and annuity as per subscriber choice.
  • During deferment, contributions are not allowed but account maintenance charges apply.

Allocation of Corpus Between Lump Sum and Annuity

At the time of exit or unfortunate death, the corpus is split between lump sum withdrawal and annuity purchase based on:

  • The minimum annuity purchase percentage (which varies with type of exit and corpus amount).
  • The maximum lump sum percentage, which is the balance after meeting the annuity purchase requirement.
  • Subscribers can choose any empanelled Annuity Service Provider (ASP) for buying annuities and compare rates using online calculators.

Scenario-Based Examples for Clarity

Scenario 1: Premature Exit with Small Corpus (₹2 Lakh)

Suppose you have been subscribed to NPS for 11 years but want to exit at age 55, and your total corpus is ₹2 lakh.

  • Since corpus is under ₹2.5 lakh and account is active for more than 10 years, you can withdraw 100% lump sum without buying annuity.
  • This exit option provides liquidity flexibility to small investors who do not want to commit to monthly pension.

Scenario 2: Premature Exit with Larger Corpus (₹10 Lakh)

You want to exit at age 50 after 8 years of subscription, and your corpus is ₹10 lakh.

  • Since the corpus is more than ₹2.5 lakh, and you have completed minimum 5 years, you can exit.
  • You must use at least 80% of corpus to purchase annuity (₹8 lakh), and withdraw 20% (₹2 lakh) as lump sum.

Scenario 3: Normal Exit at 60 with ₹7 Lakh Corpus

At age 60, your corpus is ₹7 lakh.

  • Since corpus is more than ₹5 lakh, you must use at least 40% (₹2.8 lakh) for annuity, and withdraw 60% (₹4.2 lakh) as lump sum.

Scenario 4: Death Before 60 with ₹6 Lakh Corpus

Subscriber passes away at age 55 with corpus ₹6 lakh.

  • Nominees must use at least 80% of corpus for annuity, balance 20% as lump sum.
  • If no dependents exist, annuity corpus is returned to children/legal heirs.

Frequently Asked Questions (FAQs)

Q1. Can I withdraw 100% of my corpus before 60?

  • Yes, if you have completed at least 5 years of NPS subscription and your corpus is ₹2.5 lakh or less after 10 years of account opening, you can withdraw 100% without annuity. Otherwise, minimum 80% of corpus must be used to purchase annuity.

Q2. What if I want to continue contributing after 60?

  • You can continue contributing and enjoy tax benefits till age 75.

Q3. What happens to my corpus if I die before 60?

  • Entire corpus goes to nominee/legal heir. For corpus above ₹5 lakh, at least 80% must be used to buy annuity by nominee or dependents.

Q4. Can I choose any annuity provider?

  • Yes, you can select any of the empanelled Annuity Service Providers (ASPs) listed on the official NPS website.

Q5. What is the difference between deferment and continuation?

  • Continuation allows you to keep contributing and enjoying benefits till 75.
  • Deferment allows you to delay withdrawal or annuity start without further contributions.

Conclusion

Understanding the exit rules of NPS is crucial for planning your retirement withdrawals effectively. The key takeaways:

  • Minimum 5 years subscription before exit.
  • Complete withdrawal without annuity for corpus ≤ ₹2.5 lakh allowed only after 10 years.
  • Normal exit after 60 years with flexible lump sum and annuity split.
  • Death cases provide corpus to nominee/legal heirs with annuity options.
  • Disability treated similar to superannuation exit.
  • Continuation and deferment offer flexibility post-60 years.

If you are an NPS subscriber, always evaluate your corpus size, tenure, and exit timing carefully to optimize your retirement benefits. Consult your financial advisor or visit the official NPS CRA website for detailed rates and annuity options.

Partial Withdrawal Option After 3 Years for Short-Term Contributors: Detailed Explanation (My case – sharing for your reference – if it helps)

For NPS subscribers who have contributed for a short duration—typically 2 to 3 years—there is some flexibility to withdraw funds before the standard exit conditions apply. While full withdrawal rules generally kick in after a minimum of 5 years of contribution, NPS allows partial withdrawals after 3 years, but with specific limits and conditions.

How Partial Withdrawal Works After 3 Years:

  • After completing 3 years of continuous contribution, a subscriber can withdraw up to 25% of their own contributions (the amount they personally invested, excluding employer contributions and returns) at one time.
  • This withdrawal can be done in multiple installments, meaning you can withdraw 25% multiple times, subject to the total partial withdrawal limit set by NPS.
  • The maximum cumulative partial withdrawal allowed during the entire tenure is up to 75% of your own contributions before exit.
  • However, the total corpus cannot be fully withdrawn without meeting the minimum 5-year subscription criteria for a complete exit without annuity obligation.

What Happens at Exit (Premature or Normal) After 5 Years?

  • If you exit prematurely (before 60 years of age or superannuation) but after completing 5 years of subscription, then:
    • If your total accumulated corpus is ₹2.5 lakh or less, you can withdraw 100% lump sum without any annuity purchase obligation.
    • If your corpus is above ₹2.5 lakh, you must use at least 80% of the corpus to purchase an annuity (which provides you a monthly pension), and the remaining 20% can be withdrawn as lump sum.
  • If you exit normally (after 60 years or on superannuation), the rules allow:
    • If the corpus is ₹5 lakh or less, you can withdraw the entire corpus as lump sum.
    • For corpus above ₹5 lakh, at least 40% must be used to buy annuity, and up to 60% can be withdrawn as lump sum.

Summary for Short-Term Contributors:

  • After 3 years: You can start withdrawing up to 25% of your own contributions in multiple slots.
  • The maximum cumulative partial withdrawal allowed before exit is 75% of your own contributions.
  • Full corpus withdrawal without annuity purchase obligation is only available after 5 years of subscription and subject to corpus limits (₹2.5 lakh or less).
  • Premature exit before 5 years generally requires 80% annuity purchase for corpus above ₹2.5 lakh.

Example Scenario:

Suppose you have contributed ₹1 lakh over 3 years. You can withdraw ₹25,000 (25% of contributions) after 3 years, and later withdraw another 25% in subsequent withdrawals, up to a maximum of ₹75,000 (75% of contributions). The rest remains invested until you exit after completing 5 years, where you can then apply the exit withdrawal rules depending on your total corpus.

Leave a comment

Timeline of events