The National Pension System (NPS) is a voluntary defined pension scheme for Indian citizens between 18 and 70 years, subject to certain conditions. 
 
Like the Public Provident Fund (PPF), NPS offers savings and tax benefits. A subscriber who turns 60 or older can withdraw their NPS corpus as a lump sum or annuity. 

Here is the process for NPS withdrawal, tax liability, and legal aspects.

Withdrawal Process

The withdrawal process can be broadly divided into government employees and non-government employees. One can initiate the process either online or offline.
 
For government or non-government employees (post 60 exits): Suppose your NPS corpus is Rs 5 lakh or less; you can withdraw the total amount. If it’s higher, you must invest at least 40 per cent of the amount in a monthly annuity pension plan. The rest you can withdraw in a lump sum.

Amit Sinha, group head, social security and welfare, Protean eGov Technologies Limited (formerly NSDL eGovernance Infrastructure Limited), said that annuitization is the process of converting annuity (i.e. pension) investment into series of periodic income payment under the National Pension System (NPS).

Pallav Pradyumn Narang, partner, CNK, a Mumbai based tax and legal firm, said that as per the Income Tax Act, 1961, lump sum withdrawal of 60 per cent of the corpus will be exempted from income tax. The remaining 40 per cent (which is used for buying annuity plan) will be taxable when the annuity is received by the subscriber.

According to Suvigya Awasthy, associate partner, PSL Advocates and Solicitors, a New Delhi based legal firm, in case of partial withdrawals, 25 per cent of the individual’s contribution is exempted from income tax. 

“It is indispensable that the subscribers of NPS must be alive in order to get the benefit of no tax liability to the ceiling limit of withdrawals that are permitted under the NPS. However, if the corpus is Rs 5 lakh or less, the entire amount can be withdrawn by the NPS subscriber at one go. Curiously enough, there has been no corresponding amendment to the tax regime regarding this novel change,” Awasthy further added.

In the unfortunate case of a NPS subscriber’s (non-government employee) death before attaining 60 years of age the entire accumulated pension amount will be paid to their nominees or legal heirs. Abhishek Y. Bhavsar, an Ahmedabad-based chartered accountant, said that the nominee/legal heir of the deceased subscriber shall have the option to purchase any of the annuities being offered upon exit, if they so desire, while applying for withdrawal of benefits on account of deceased subscribers’ Permanent Retirement Account (PRAN).

“This income if withdrawn on lump sum basis shall be completely tax-free (in the hands of widow or other legal heirs of the subsciber). However, any periodical payment shall be subject to income tax as per applicable slab rates,” added Bhavsar.
 
Online Process:
  
● First, you will need to visit the NPS-NSDL CRA website-https://cra-nsdl.com/CRA/
 
● Then, log in using your PRAN card number, password, and other details.
 
● Find the button ‘exit withdrawal request’ in the menu bar. 
 
● Select the reason, ‘exit at 60,’ and click submit.
 
● Enter the lump sum and annuity percentage.
 
● Then, input your preferences, such as annuity frequency, scheme, etc.
 
● You can also modify the nominee details should the need arise.
 
● In transaction type, you can select electronic, which implies the money would be directly credited to your bank account.
 
After this request, another KYC (know-your-customer) page will pop up, asking for specific documents, which you can scan in a single PDF file to upload on the portal. In addition, your identity and address documents must be attested by a nodal office.
 
Hence, you should keep your bank passbook, a cancelled cheque, Aadhaar card, driver’s licence, and other necessary documents scanned and attested by a nodal office before starting the withdrawal process. “It is mandatory for a subscriber to upload the scanned copies of their KYC documents for seamless processing of exit and annuity request,” NPSCRA’s FAQ reads. The subscriber is also required to upload them in a single scanned file.

Offline Process 

Subscribers can download the required forms for partial withdrawal, premature withdrawal, superannuation or incapacitation, etc., from the NPSCRA website and submit the filled forms at their nearby NPS PoP (Points of presence) office along with their KYC documents. 
 
Also note the withdrawal form for government employees is Form 103-GD, different for non-government employees.

What Choices Does One Have?

When one reaches superannuation age (60 or above), either of the following choices can be choosen.

• You may choose to withdraw lump sum amount (60 per cent maximum) and annuitize the remaining amount. 
• You might choose to annuitize the entire corpus without any withdrawal of lump sum amount (100 per cent).
• One might choose either to defer (or postpone) withdrawal of lump sum amount till 75 years of age or defer annuitisation up to 3 years.
• There is also an option of deferment both lump sum withdrawal along with annuitization.
• One may choose to continue in NPS till 75 years of age. 

The default option is annuitisation of minimum 40 per cent of accumulated corpus and lump sum withdrawal of remaining 60 per cent of the accumulated corpus, “an NPS Subscriber has the option to annuitize upto 100 per cent of the accumulated amount that would lead to a higher Annuity (Pension) for the Subscriber,” added Sinha.

According to Sinha, given the increased mortality age in today’s times, an individual (along with spouse) is likely to have over three decades of retirement life. For this purpose, and considering the inflation rates, a larger steady pension income is of utmost importance.

“Accordingly, I would like to reiterate that the subscriber opting for annuitization of 100 per cent of the accumulated corpus, so that they would be able to avail a higher pension amount,” Sinha further added.

Bhavsar said that the annuity amount which is being withdrawn periodically is taxable as salary but is exempted for certain category of taxpayers as specified u/s 10 of the Income Tax Act, 1961.