Using Your NPS Corpus to Reskill or Start a Venture: The PFRDA Circular That Added Self-Development as a Withdrawal Purpose

The National Pension System (NPS) was designed as a one-way street: money goes in, locks until age 60, and only then splits into a 60% lump sum and a 40% annuity. But a PFRDA circular numbered PFRDA/2018/47/Reg-Exit/4, dated 24 May 2018 and last updated on 17 September 2025, quietly widened the list of reasons a subscriber can tap that corpus early. It added two modern purposes: meeting the expenses of skill development, re-skilling or any other self-development activity, and meeting the expenses for the establishment of the subscriber's own venture or start-up.

For a 40-something professional weighing a mid-career pivot, this matters. Until 2018, the only way to fund a career break or a small business from your pension pot was to either wait two decades for the age-60 exit or trigger a premature exit that forces 80% of the corpus into a compulsory annuity. The 2018 circular created a third path: a tax-free partial withdrawal of up to 25% of your own contributions, available three times across your membership, for reasons that now include reinventing your own earning capacity.

This article compares that partial-withdrawal route against the alternative of liquidating other retirement assets, walks through the exact tax treatment under the Income Tax Act, and runs a 20-year drawdown illustration so you can see what a Rs 3.75 lakh withdrawal at age 40 actually costs your age-60 corpus.

The Scheme Explained

NPS partial withdrawal sits under Regulation 8 of the PFRDA (Exits and Withdrawals under NPS) Regulations, 2015, and applies only to Tier I accounts. The mechanics are deliberately narrow, and the 2018 circular did not loosen the limits; it only expanded the list of qualifying purposes.

Three hard rules govern every partial withdrawal, regardless of purpose:

The "own contributions only" base is the detail most subscribers get wrong. If your Tier I balance is Rs 30 lakh but only Rs 15 lakh of that came from your own pocket (the rest being employer matching and market growth), your 25% ceiling is calculated on Rs 15 lakh, giving a maximum withdrawal of Rs 3.75 lakh, not Rs 7.5 lakh.

The purposes for which the 25% can be released were originally limited to higher education of children, marriage of children, purchase or construction of a residential house, and treatment of specified critical illnesses. The PFRDA/2018/47/Reg-Exit/4 circular added skill development, re-skilling and other self-development activities, and separately the establishment of the subscriber's own venture or start-up. As of the 17 September 2025 update, both purposes remain live on the PFRDA register.

The process for requesting the withdrawal has also been streamlined since 2018. PFRDA now permits subscribers to submit the request online with a self-declaration of the purpose, rather than routing physical documentary proof through the nodal office or point-of-presence for every claim. This matters for the venture and re-skilling purposes in particular, because a person mid-pivot may not yet hold the invoices or admission letters a paper process would have demanded. The 3-year membership test, the 25% cap and the three-times limit still apply in full; only the paperwork burden has fallen.

One frequent point of confusion is the distinction between Tier I and Tier II accounts. Partial withdrawal under Regulation 8 applies exclusively to the Tier I retirement account. The Tier II account is a voluntary, fully liquid savings facility with no lock-in and no withdrawal restrictions at all, so the 25% rule, the three-times limit and the 2018 purpose list are irrelevant to it. If your goal is simply quick access to cash, Tier II money can be withdrawn any day without invoking the partial-withdrawal regime.

The table below sets out how the partial-withdrawal route compares with the two alternatives a 40-something typically considers when funding a pivot:

Because the partial withdrawal keeps your NPS account open and only removes a slice of your own contributions, the remaining corpus continues compounding. That is the structural advantage over a premature exit, which forces 80% of everything into a compulsory annuity the moment you pull the trigger.

Tax on Withdrawal

The tax treatment is where the partial-withdrawal route decisively beats liquidating other assets. NPS enjoys a dedicated exemption for partial withdrawals that no other retirement product matches.

Under Section 10(12B) of the Income Tax Act, 1961, any partial withdrawal from a Tier I NPS account, up to 25% of the subscriber's own contributions, is fully exempt from income tax. There is no holding-period test and no slab calculation; the entire eligible amount lands in your bank account untaxed. This is the provision that makes funding a re-skilling course or seed capital from NPS cheaper than selling equity.

For context, here is how the three NPS exit events are taxed:

Compare this with the alternative of selling equity mutual funds to raise the same cash. Long-term capital gains on listed equity are taxed at 12.5% above an annual exemption of Rs 1.25 lakh, following Budget 2024 (effective 23 July 2024). On a Rs 3.75 lakh redemption carrying, say, Rs 2 lakh of gains, you would pay 12.5% on Rs 75,000 of taxable LTCG, roughly Rs 9,375, where the NPS route costs nothing.

The annuity leg deserves a closer look, because it is the only NPS cash flow that is taxed. At age 60, a minimum of 40% of the corpus must be used to purchase an annuity from a PFRDA-empanelled life insurer, and the monthly pension that annuity pays is added to your total income and taxed at your slab rate in each year of receipt. There is no separate concessional rate for annuity income; a retiree in the 30% bracket effectively pays 30% plus 4% cess on that pension stream. This is why the annuity vs SWP choice is worth modelling carefully rather than defaulting to the minimum 40% annuity.

One contribution-side point that is frequently misstated: the additional Rs 50,000 deduction under Section 80CCD(1B) is available only under the old tax regime. It cannot be claimed in the new tax regime under FY 2025-26. The employer-contribution deduction under Section 80CCD(2), by contrast, is available in both regimes. None of this changes the withdrawal exemption, but it affects the true cost of building the corpus you are about to tap.

Worked Drawdown

Numbers make the trade-off concrete. Consider Meera, a 40-year-old product manager who joined NPS in 2014, giving her 12 years of membership by 2026 (comfortably past the 3-year minimum). Her Tier I corpus is Rs 30 lakh, of which Rs 15 lakh represents her own contributions.

Her eligible partial withdrawal is 25% of Rs 15 lakh, which is Rs 3.75 lakh, received entirely tax-free under Section 10(12B). She uses it to fund a certified data-analytics re-skilling programme and seed capital for a small consulting venture, both qualifying purposes under the PFRDA/2018/47/Reg-Exit/4 circular.

To see the long-run cost, assume her account continues with Rs 1.2 lakh of annual contributions (Rs 10,000 a month) and an illustrative 9% annualised return through to age 60. The 9% figure is an assumption for illustration only; actual NPS returns are market-linked and not guaranteed. The table tracks her corpus with and without the Rs 3.75 lakh withdrawal taken at age 40:

The arithmetic is unsentimental: a Rs 3.75 lakh withdrawal at 40 foregoes roughly Rs 21 lakh of corpus at 60, because Rs 3.75 lakh compounding at 9% for 20 years grows to about Rs 21.01 lakh. That is the opportunity cost of pulling the money two decades early.

At age 60, Meera's with-withdrawal corpus of about Rs 2.09 crore still splits the standard way. Up to 60%, roughly Rs 1.25 crore, can be taken as a tax-free lump sum under Section 10(12A). The remaining 40%, about Rs 84 lakh, must buy an annuity whose income is taxed at her slab rate. You can model both legs using the NPS calculator and stress-test the annuity-versus-systematic-withdrawal choice with the annuity vs SWP tool.

The decision, then, is not "free money." It is whether Rs 3.75 lakh deployed today into your own earning capacity, a re-skilling certificate or a venture, can generate more than the Rs 21 lakh of foregone retirement corpus over the same horizon. For a professional whose post-pivot income rises by even Rs 2 lakh a year, the maths often favours the withdrawal. For a withdrawal funding consumption dressed up as "self-development," it rarely does.

FAQ

Can I really use NPS money to start a business?

Yes. The PFRDA circular PFRDA/2018/47/Reg-Exit/4, dated 24 May 2018 and updated 17 September 2025, expressly permits partial withdrawal for the establishment of the subscriber's own venture or start-up. The withdrawal is still capped at 25% of your own contributions and counts towards your lifetime limit of three partial withdrawals.

How much can I withdraw for re-skilling?

Up to 25% of your own contributions to the Tier I account, calculated excluding employer contributions and accrued returns. If your own contributions total Rs 15 lakh, the maximum is Rs 3.75 lakh per the PFRDA Exit Regulations 2015.

Is the partial withdrawal taxable?

No. Under Section 10(12B) of the Income Tax Act, 1961, a partial withdrawal of up to 25% of your own contributions is fully exempt from income tax, with no holding-period condition.

How many times can I take a partial withdrawal?

A maximum of three times during your entire NPS membership, under the PFRDA Exit Regulations 2015. The re-skilling and venture purposes added in 2018 draw from the same three-withdrawal pool as the older purposes such as higher education or house purchase.

Do I need a minimum number of years in NPS?

Yes. You must have been an NPS subscriber for at least 3 years from your date of joining before a partial withdrawal is permitted, per the PFRDA Exit Regulations 2015.

Can I claim 80CCD(1B) and still make a partial withdrawal?

The Rs 50,000 deduction under Section 80CCD(1B) is a contribution-side benefit available only in the old tax regime for FY 2025-26, and is unrelated to withdrawals. Taking a partial withdrawal does not forfeit deductions already claimed in earlier years.

Is this better than selling my mutual funds?

On tax alone, usually yes. The NPS partial withdrawal is exempt under Section 10(12B), whereas redeeming equity mutual funds attracts 12.5% LTCG above the Rs 1.25 lakh annual exemption after Budget 2024. The trade-off is the foregone compounding inside NPS, which our worked example puts at roughly Rs 21 lakh over 20 years on a Rs 3.75 lakh withdrawal. Model your own numbers with the retirement drawdown calculator before deciding.