NPS Premature withdrawl -Tier 1 Account

For a premature NPS Tier 1 exit with a corpus under ₹5 Lakhs, PFRDA permits a 100% lump sum withdrawal without requiring any annuity purchase. However, because it is a voluntary premature exit before age 60, the 60% tax exemption rule does not apply. The entire 100% lump sum amount is fully taxable under the subscriber's regular income tax slab rates.

Here is a basic overview of how an NPS Tier-I Account functions:

The NPS Tier-I account consists of two main aspects:

 (1) partial withdrawal, which may be permitted after 36 months and is restricted to approved reasons like higher education or marriage of children, first-time home purchase or construction, and medical crisis, etc. The amount that can be withdrawn is 25% of the subscriber's contribution (excluding employer contribution and investment returns)

 (2) premature termination of the NPS accounts prior to attainment of age 60 requires a generally sufficient length of subscripttion of 5 years. In such cases, where the amount in your account exceeds the threshold set by the PFRDA rules, the following will apply:

(a) You may take 20% lump sum from the NPS, and the remaining 80% must be applied to buy an annuity

(b) Full withdrawal from the NPS will be permitted (no annuity purchase required) where the total balance is not greater than the limit established by the PFRDA. 

The ability to make the requested withdrawal of funds will depend on:

1) Age

2) Length of time in the NPS since you first enrolled

3) Current annuity value, and

4) You are trying to make a partial withdrawal or you want to terminate the NPS prematurely.

If you provide additional details I will be able to assist you in obtaining a more accurate response from members.

My accumulated pension wealth is approximately ₹3.63 lakh. I intend to close out the nps prematurely, the contributions were from 2014 to 2016

there is no annuity value

NPS premature exit when corpus is under Rs 5 lakh:

PFRDA allows 100% lump sum withdrawal when total corpus does not exceed Rs 5 lakh at the time of exit. You are not required to purchase an annuity in such cases, even though standard premature exit rules mandate 80% annuity purchase.

Tax treatment under Section 10(12A) of the Income Tax Act:

• 60% of the lump sum received is exempt from tax
• 40% is taxable as income from other sources in the year of receipt

For a corpus of Rs 3.63 lakh: approximately Rs 2.18 lakh is exempt and Rs 1.45 lakh is added to taxable income. Under the new tax regime with rebate under Section 87A, this may result in nil tax if total income is within the applicable threshold.

Note: The 60% exemption under Section 10(12A) covers the entire corpus including accumulated returns, not just contributions made.

Tax Garden handles NPS, ITR and compliance advisory, taxgarden.in