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National Pension System (NPS), one of the most popular investment options in the country for retirement planning, has often been believed to be a very strict and lock-in based scheme, from where it is almost impossible to withdraw money before retirement. However, after the Pension Fund Regulatory and Development Authority (PFRDA) made the rules of partial withdrawal simple and digital, the question arising in the minds of many subscribers is whether NPS has now become as liquid and easy as EPF?
According to financial experts, even though the withdrawal process has become easier, the 25% withdrawal system of NPS is completely different from that of PF and is bound by strict conditions. In such a situation, it is important for every subscriber to deeply understand how wise it is to withdraw from NPS before retirement and what is its complete mathematics.
The biggest confusion among most of the NPS account holders is regarding the calculation of 25%. Many people assume that 25 percent of the total balance shown in their PRAN account can be withdrawn, whereas the rules are completely different.
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Calculation only on own original contribution: The 25 percent withdrawal limit applies to the original amount deposited by you (Self-Contribution). It neither includes the employer’s contribution nor the interest/returns earned in previous years.
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Understand mathematics with example: Suppose the total corpus in your NPS Tier-1 account is ₹20 lakh. In this, your own contribution is ₹6 lakh, the employer’s contribution is ₹4 lakh and the remaining ₹10 lakh is the return on investment.
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Eligible Withdrawal Amount: You will not get 25% of the total ₹20 lakh (₹5 lakh), but 25% of your own contribution of ₹6 lakh i.e. maximum ₹1.50 lakh Only this will be available for withdrawal.
As per PFRDA Master Circular, partial withdrawal from NPS Tier-1 account can be made only in specific circumstances:
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Minimum 3 years lock-in: It is mandatory to complete active contributions for at least 3 years (36 months) from the date of account opening.
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Maximum 3 times allowed during entire service period: A subscriber can make partial withdrawals only a maximum of 3 times during his entire NPS tenure (up to the age of 60 years).
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Interval between two withdrawals: There must be fresh accumulation of contributions between the previous withdrawal and the new withdrawal.
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100% Tax Free Withdrawal: Under Section 10(12B) of the Income Tax Act, valid partial withdrawals up to 25% made from NPS are completely tax-free.
To avoid unnecessary expenditure of NPS funds, the regulator has set limited and mandatory withdrawal objectives:
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Higher education of children: To meet the expenses of higher education (degree/diploma) of legally adopted or biological children.
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Marriage of children: To meet the expenses related to the marriage of a son or daughter.
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Purchase/construction of residential house or flat: To purchase a first house in your own name or in joint name with your spouse (if not already an independent house other than the ancestral home).
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Serious and life-threatening diseases: For treatment of notified critical illnesses like Cancer, Kidney Failure, Heart Surgery, Organ Transplant, Stroke and COVID-19 (for self, spouse, children or dependent parents).
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Skill Development and Re-skilling: To pay fees for professional courses from recognized institutions for career upgradation.
Even though both are retirement plans, PF is far more flexible in terms of withdrawals:
| scale | EPF (EPF / PF) | NPS (NPS Tier-1) |
| withdrawal basis | Employee + Company Contribution + Interest | Self-contribution only |
| withdrawal limit | From 50% to 90% depending on various reasons | Maximum 25% of own contribution |
| term limit | Possible multiple times depending on need | Maximum 3 times in the entire tenure |
| unemployment withdrawal | 75-100% after 1-2 months after job loss | Premature Exit Rule only (80% annuity mandatory) |
Financial planners clearly believe that NPS is a long-term compounding wealth engine. This fund, made up of a combination of equity and debt, forms the main basis of your pension and lump sum fund after the age of 60.
If you withdraw ₹2-3 lakh from NPS in your 30s or 40s, you not only lose the principal amount but also lose a huge 10 to 12 per cent compounding growth on that money over the next 15-20 years, which could reduce the final corpus at retirement by several lakhs. Experts advise that unless there is an unavoidable situation like a medical emergency, do not touch the NPS fund at all and resort to a separate mutual fund SIP or emergency fund for children’s marriage or education.