NPS Partial Withdrawals Explained: PFRDA 2024 Master Circular on the 25 Percent Rule

The single most misunderstood feature of the National Pension System is the rule that lets you take money out before you retire. Ask ten NPS subscribers how much of their Tier I balance they can withdraw early, and most will guess wrong. The answer, fixed by the Pension Fund Regulatory and Development Authority (PFRDA) in its consolidated Master Circular of 12 January 2024, is a maximum of 25 percent — but of a very specific slice of the account, capped at three withdrawals across your entire membership, and permitted only after three years and only for named reasons.

This guide sets the 25 percent partial-withdrawal rule against the two alternatives a subscriber usually weighs it against: leaving the corpus untouched to compound until age 60, or exiting early. We work through the PFRDA rulebook, the tax treatment on the way out, and a multi-year drawdown example so you can see exactly what a partial withdrawal costs in future corpus.

The Scheme Explained

NPS is a defined-contribution retirement product regulated by PFRDA under the PFRDA Act, 2013. A Tier I account is the retirement account proper: it carries the tax breaks and, crucially, the lock-in. Tier II is a voluntary, no-lock-in add-on with no tax deduction on contributions and no partial-withdrawal restriction — because there is nothing to restrict. Partial withdrawal, as a regulated event, applies only to Tier I.

The governing document is PFRDA Master Circular PFRDA/MASTERCIRCULAR/2024/01/CRA-01, dated 12 January 2024, which consolidates the earlier partial-withdrawal instructions into one place and is published in the active master-circulars list at pfrda.org.in. Under it, a Tier I subscriber may withdraw up to 25 percent of their accumulated wealth, subject to four conditions that operate together:

Two details trip people up. First, the 25 percent is calculated on the contributions made by the subscriber, not on the total fund value. The growth on your money and, in the corporate model, the employer's share are excluded from the base. So on a Tier I corpus that has grown to Rs 20 lakh from Rs 12 lakh of your own contributions, the maximum you can take is 25 percent of Rs 12 lakh — that is Rs 3 lakh — not Rs 5 lakh.

Second, the three-withdrawal ceiling is a lifetime count, not a per-reason count. If you take one partial withdrawal for a house and a second for a child's education, you have exactly one left for the remainder of your working life. PFRDA also requires a gap between withdrawals in practice, routed and verified through the Central Recordkeeping Agency (CRA) with documentary proof of the qualifying reason.

Because NPS returns are market-linked rather than administered, there is no fixed "NPS rate" the way PPF carries 7.1 percent for the July-September 2026 quarter or the Senior Citizens' Savings Scheme carries 8.2 percent. Your Tier I balance reflects the NAV of the pension-fund schemes you hold across equity, corporate bonds and government securities. That is the backdrop against which a partial withdrawal has to be judged: money taken out stops compounding at a market-linked rate you cannot replicate elsewhere. To model your own trajectory, our NPS calculator lets you vary the contribution, the equity allocation and the assumed return.

Tax on Withdrawal

The tax treatment of an NPS partial withdrawal is unusually generous, and it is the single strongest argument for using the facility rather than exiting early or breaking another investment.

Under Section 10(12B) of the Income-tax Act, 1961, a partial withdrawal from a Tier I account is fully exempt from tax up to 25 percent of the subscriber's own contributions, provided the withdrawal meets the PFRDA conditions above. There is no lock-in on the tax break and no clawback: the exempt amount does not re-enter your taxable income in any later year. This is confirmed in the Income-tax Department's own return-filing guidance at incometax.gov.in.

Contrast that with the two alternatives:

The design is deliberate. NPS gives you a tax-free door at 25 percent through partial withdrawal, a tax-free lump-sum door at 60 for the 60 percent, and taxes only the annuity stream — because a pension is income and income is taxed. The annuity you eventually buy is taxed at your applicable slab under the FY 2025-26 structure, where the new regime is nil up to Rs 4 lakh, 5 percent from Rs 4-8 lakh, and rises to 30 percent above Rs 24 lakh, with a Section 87A rebate of up to Rs 60,000 making income up to Rs 12 lakh effectively tax-free before the annuity is layered on.

A point on the contribution-side deduction, since it shapes whether the account is worth funding at all: Section 80CCD(1B) is not allowed in the new regime — the additional Rs 50,000 deduction it offers can be claimed only in the old regime. If you have opted into the new regime, the only NPS deduction that survives is the employer contribution under Section 80CCD(2). Anyone relying on the extra Rs 50,000 must be filing under the old regime for that year. You can see how the two regimes compare on identical income using our income tax calculator.

For an NRI subscriber, the annuity and any withdrawal interact with the relevant Double Taxation Avoidance Agreement. It is worth stating plainly, because the mistake is common: a DTAA does not make Indian-source capital gains "exempt" — India retains its taxing right, currently at 12.5 percent on long-term equity gains above the Rs 1.25 lakh annual exemption. The treaty allocates and credits tax; it does not delete it. See our glossary entry on the DTAA for how the credit mechanism works.

Worked Drawdown

The real question is not "can I withdraw 25 percent?" but "what does taking it out cost me?" NPS is a compounding vehicle, and money removed at 45 does not come back at 60. Here is a concrete, multi-year illustration.

The subscriber. Anjali is 45, has been an NPS Tier I member for 15 years, and has made cumulative own-contributions of Rs 12,00,000. Her Tier I corpus, after market growth, stands at Rs 24,00,000. She wants Rs 3,00,000 for her daughter's college admission — a permitted reason under the 2024 Master Circular.

Step 1 — What she is allowed to take. The ceiling is 25 percent of her own contributions of Rs 12,00,000, which is Rs 3,00,000. Her requirement fits exactly within the cap, so the full Rs 3,00,000 is permitted. Because it satisfies the Section 10(12B) conditions, the entire Rs 3,00,000 is received tax-free. She has used one of her three lifetime partial withdrawals.

Step 2 — The corpus that keeps compounding. After the withdrawal, Rs 21,00,000 remains invested. Assume a market-linked 9 percent annualised return for the 15 years to age 60 (illustrative, not guaranteed — NPS returns vary with your asset mix). The table below shows the path of the retained corpus, and, in the final column, what the Rs 3,00,000 she withdrew would itself have grown to had it stayed invested.

The arithmetic is unforgiving: the Rs 3,00,000 she took out at 45 would have compounded to roughly Rs 10,92,700 by age 60 at 9 percent. That is the true cost of the partial withdrawal — not Rs 3,00,000, but the Rs 10.9 lakh of end-corpus it will never become. The tax exemption softens the sting, but it does not erase the opportunity cost. You can stress-test this trade-off for your own numbers with the retirement drawdown calculator.

Step 3 — What happens at exit. Say the retained corpus reaches Rs 76,49,000 at age 60. Under the exit rules, Anjali may take up to 60 percent — Rs 45,89,400 — as a tax-free lump sum under Section 10(12A), and must use at least 40 percent — Rs 30,59,600 — to purchase an annuity. If that annuity pays, say, 6 percent, it yields about Rs 1,83,576 a year, taxed at her slab in the year of receipt. Whether she should annuitise more than the mandatory 40 percent, or compare an annuity against a systematic withdrawal plan, is a separate decision our annuity vs SWP calculator is built to answer.

The strategic takeaway: a partial withdrawal is best treated as a genuine emergency door, not a routine liquidity tap. Its tax-free status makes it cheaper than breaking a taxable investment, but the 25 percent ceiling on own-contributions, the three-withdrawal lifetime limit, and the loss of 15-plus years of compounding all argue for using it sparingly and late rather than early and often.

FAQ

How much can I withdraw from my NPS Tier I account before retirement?

Up to 25 percent of the contributions you personally made — not 25 percent of the total fund value. Growth and any employer contribution are excluded from the base. On Rs 12,00,000 of own contributions, the maximum partial withdrawal is Rs 3,00,000, regardless of how much the corpus has grown. This is set by PFRDA Master Circular PFRDA/MASTERCIRCULAR/2024/01/CRA-01 dated 12 January 2024.

How many times can I make a partial withdrawal?

A maximum of three times across your entire NPS membership. It is a lifetime count, not a per-year or per-reason allowance. If you take one withdrawal for a house and one for education, you have a single partial withdrawal left for the rest of your working life.

Do I need a minimum number of years in NPS before withdrawing?

Yes. You must have been a subscriber for at least three years from your date of joining before your first partial withdrawal, under the 2024 Master Circular. Each withdrawal also requires a permitted reason and documentary proof routed through the Central Recordkeeping Agency.

Is the partial withdrawal taxable?

No, provided it meets the PFRDA conditions. Section 10(12B) of the Income-tax Act, 1961 exempts a Tier I partial withdrawal up to 25 percent of the subscriber's own contributions. The exempt amount does not re-enter your taxable income later. Full details are in the return-filing guidance at incometax.gov.in.

What are the permitted reasons for a partial withdrawal?

House purchase or construction, treatment of specified illnesses, children's higher education, children's marriage, disability, skill development or re-skilling, and setting up a new venture. Withdrawals for reasons outside this list are not permitted; you would have to make a premature exit instead, under far stricter terms.

Can I withdraw the full amount if I leave before age 60?

No. A premature exit before 60 allows only 20 percent as a lump sum, with at least 80 percent compulsorily annuitised — the reverse of the age-60 rule, where 60 percent is a tax-free lump sum and 40 percent is annuitised. Partial withdrawal, capped at 25 percent of own contributions, is the only way to access money early while keeping the account alive.

Does the Section 80CCD(1B) deduction apply if I make a partial withdrawal?

The two are unrelated. Section 80CCD(1B) is not allowed in the new regime; this contribution-side deduction of up to Rs 50,000 can be claimed only in the old regime. It concerns money going in, not coming out. A partial withdrawal does not trigger any reversal of deductions already claimed, provided the withdrawal itself satisfies Section 10(12B).