NPS Partial Withdrawal Before Retirement: The 25% Cap on Your Own Contributions, the 3-Year Wait and the 3-Time Limit

The National Pension System is built to be illiquid on purpose. Money you route into a Tier I account is meant to stay locked until you turn 60, because that discipline is exactly what forces a retirement corpus to compound across three or four decades. Yet life does not wait for age 60. A child's medical bill, a college admission fee due in three weeks, or the deposit on a first home can all land long before your superannuation date. This is where the partial withdrawal window inside NPS Tier I matters, and where most subscribers misread the maths badly enough to be disappointed at the counter.

The single most misunderstood point is the base on which the 25% cap is calculated. Subscribers assume a quarter of their entire fund value is available. It is not. The Pension Fund Regulatory and Development Authority (PFRDA) permits a partial withdrawal of up to 25% of the subscriber's own contributions only, measured as on the date of the request, and it deliberately excludes both the investment growth on those contributions and any employer contributions credited to the account. On a corpus that has doubled through market appreciation, that distinction can halve the amount you actually receive.

This guide walks through the exact PFRDA eligibility rules, the tax treatment under Section 10(12B) of the Income Tax Act, a multi-year worked example that separates contributions from corpus, and how partial withdrawal fits into a broader drawdown plan alongside the final exit at 60. Every rule below is drawn from PFRDA's exit and withdrawal framework and the current provisions of the Income Tax Act.

The Scheme Explained

NPS was launched for central government recruits joining on or after 1 January 2004 and was opened to all Indian citizens between 18 and 70 on a voluntary basis from 1 May 2009. It is regulated by PFRDA under the Pension Fund Regulatory and Development Authority Act, 2013. A subscriber holds two possible accounts: the mandatory, locked-in Tier I retirement account, and the optional, freely withdrawable Tier II account that carries none of the tax breaks. Partial withdrawal rules apply exclusively to Tier I. If you are still deciding how much to route into NPS each year, the NPS calculator projects the corpus your contributions could build by 60.

Partial withdrawal from Tier I is governed by the PFRDA (Exits and Withdrawals under the National Pension System) Regulations, 2015. Three hard conditions must all be satisfied before a rupee leaves the account. First, the subscriber must have completed a minimum of 3 years from the date of joining NPS. Second, the amount cannot exceed 25% of the subscriber's own contributions as on the date of the request. Third, a subscriber is allowed a maximum of 3 partial withdrawals across the entire tenure of the account before age 60, and each successive request can only be made against fresh contributions accumulated since the previous withdrawal.

The purpose test is equally strict. PFRDA permits a partial withdrawal only for specified life events, and the subscriber must self-declare the reason. The permitted purposes are the higher education of children, the marriage of children, the purchase or construction of a residential house or flat, the treatment of specified critical illnesses, medically certified disability, and the cost of setting up a new venture or start-up. A holiday, an equity punt, or a routine cash crunch does not qualify under the 2015 Regulations.

The table below distils the eligibility framework that a Tier I subscriber faces before applying.

It is critical to separate this partial withdrawal from the final exit at superannuation. At age 60, PFRDA requires that a minimum of 40% of the accumulated Tier I corpus be used to purchase an annuity from an empanelled life insurer, with up to 60% available as a lump sum. Where the total accumulated corpus at 60 is Rs 5 lakh or less, the subscriber may withdraw the entire amount as a lump sum without any compulsory annuitisation. Partial withdrawal, by contrast, is a mid-career top-up against your own savings and does not disturb the eventual 40% annuity obligation. For a fuller view of how the mandatory annuity slice compares with a self-managed drawdown, the annuity versus SWP calculator is a useful starting point.

Tax on Withdrawal

The tax treatment is where NPS partial withdrawal quietly beats almost every other retirement vehicle. Under Section 10(12B) of the Income Tax Act, a partial withdrawal of up to 25% of the subscriber's own contributions from a Tier I account is fully exempt from income tax. There is no lock-in on the exemption, no holding-period test on the units sold, and no capital gains computation. The Rs 1,50,000 that a subscriber pulls out for a child's college fee is received in full, unlike a mutual fund redemption where long-term capital gains above Rs 1.25 lakh are taxed at 12.5% under the post-Budget-2024 regime.

At the final exit stage the arithmetic changes. Under Section 10(12A), the lump-sum withdrawal of up to 60% of the Tier I corpus at superannuation or age 60 is exempt from tax. The remaining 40% is not taxed at the point of annuity purchase either, because buying the annuity is treated as a transfer within the pension architecture rather than income. The pension income that the annuity subsequently pays out, however, is taxable in the subscriber's hands at the applicable slab rate in each year of receipt, the same way a salary or interest income is taxed.

On the contribution side, the deductions depend heavily on which tax regime you have chosen, and this is where subscribers routinely trip up. The additional deduction of up to Rs 50,000 for self-contributions under Section 80CCD(1B) is not allowed in the new tax regime; the 80CCD(1B) benefit can be claimed only under the old regime, which fewer taxpayers now use since the new regime became the default. The employer's contribution deduction under Section 80CCD(2), which is a separate provision, does survive under the new regime, and its limit was raised to 14% of salary (basic plus dearness allowance) for the new regime by the Finance Act, against 10% under the old regime for non-government employees.

The table below summarises the four tax touch-points of an NPS Tier I journey.

Because the partial withdrawal is exempt while the annuity is taxable, a subscriber who is disciplined about the purpose test can extract meaningful liquidity across a 30-year career without a single rupee of tax, and still preserve the compulsory 40% annuity that funds old age. That is the drawdown edge this scheme offers, and it is what the worked example below quantifies.

Worked Drawdown

Consider Ananya, who joins NPS at age 30 in the 2016-17 financial year and contributes Rs 60,000 into her Tier I account every year. All figures below are illustrative; NPS returns are market-linked and carry no guaranteed rate, so the corpus values assume a 9% blended annual return purely for demonstration, not as a promise. The point of the illustration is the contributions-versus-corpus distinction, which does not change with the return assumption.

By the 2025-26 financial year, ten years in, Ananya has contributed Rs 60,000 x 10 = Rs 6,00,000 of her own money. With market appreciation at the assumed 9%, her fund value has grown to roughly Rs 9,10,000. Her daughter's engineering admission needs Rs 1,50,000. Ananya has cleared the 3-year minimum, so she is eligible. Her maximum partial withdrawal is 25% of her own contributions, which is 25% x Rs 6,00,000 = Rs 1,50,000. Crucially, it is not 25% of the Rs 9,10,000 corpus, which would have been Rs 2,27,500. The Rs 1,50,000 she receives is exempt under Section 10(12B), and this counts as the first of her three permitted lifetime withdrawals.

Suppose Ananya continues contributing Rs 60,000 a year and returns to the well twice more. The table below tracks each withdrawal against the fresh own-contributions accumulated since the previous one, which is how PFRDA computes successive requests.

Across three withdrawals Ananya extracts Rs 3,30,000 tax-free, while the bulk of her corpus keeps compounding untouched. By the time she reaches 60 in the 2046-47 financial year, the residual corpus, still assuming the illustrative 9% path, could be in the region of Rs 1 crore. At that final exit she must annuitise at least 40%, or Rs 40,00,000, and can take up to 60%, or Rs 60,00,000, as a tax-free lump sum under Section 10(12A). The Rs 40,00,000 annuity might pay a monthly pension that is then taxed at her slab rate each year.

To see how the tax-free lump sum and the taxable annuity interact with your own numbers, the retirement drawdown calculator lets you model a withdrawal schedule year by year. If you also expect a lump-sum gratuity at retirement, note that the tax-exempt gratuity ceiling under Section 10(10) of the Income Tax Act stands at Rs 20 lakh following the Finance Act, 2018, and the gratuity calculator applies that cap automatically. Read alongside our recent guides on the Senior Citizens Savings Scheme at 8.2% and the Atal Pension Yojana pension slabs, NPS partial withdrawal completes the mid-career liquidity picture that fixed-rate schemes cannot match.

The comparison table below sets NPS partial withdrawal against the liquidity rules of two other core retirement vehicles, using the current government rates on file.

FAQ

Can I withdraw 25% of my total NPS corpus?

No. The 25% ceiling applies strictly to your own contributions as on the date of the request, and it excludes both the investment growth on those contributions and any employer contributions. If you contributed Rs 6,00,000 but the fund is worth Rs 9,10,000, your maximum partial withdrawal is 25% of Rs 6,00,000, which is Rs 1,50,000, not 25% of Rs 9,10,000. This is set out in the PFRDA (Exits and Withdrawals) Regulations, 2015.

How many times can I make a partial withdrawal from NPS?

A maximum of 3 times during the entire tenure of the Tier I account before age 60. There must also be a minimum of 3 years from your date of joining before the first request, and each subsequent withdrawal is calculated only on the fresh own-contributions accumulated since your previous withdrawal, not on the original base again.

Is NPS partial withdrawal taxable?

No. Under Section 10(12B) of the Income Tax Act, a partial withdrawal of up to 25% of your own contributions from a Tier I account is fully exempt from income tax, with no holding-period or capital-gains computation. This is more favourable than redeeming an equity mutual fund, where long-term gains above Rs 1.25 lakh are taxed at 12.5%.

For what reasons can I take a partial withdrawal?

PFRDA permits partial withdrawal only for specified purposes: the higher education or marriage of your children, the purchase or construction of a residential house, the treatment of specified critical illnesses, a medically certified disability, or the cost of setting up a new venture. A discretionary expense such as a holiday does not qualify under the 2015 Regulations.

Does the additional Rs 50,000 deduction apply in the new tax regime?

No. The Section 80CCD(1B) deduction of up to Rs 50,000 for your own NPS contributions is not allowed in the new tax regime; 80CCD(1B) can be claimed only under the old regime. The separate employer contribution deduction under Section 80CCD(2) is available in both regimes, with a ceiling of 14% of salary in the new regime for eligible employees.

What happens to the rest of my NPS money at retirement?

At age 60, a minimum of 40% of your Tier I corpus must be used to buy an annuity from an empanelled insurer, and up to 60% can be taken as a tax-free lump sum under Section 10(12A). If your total corpus at 60 is Rs 5 lakh or less, you may withdraw the entire amount as a lump sum without buying any annuity. The pension paid by the annuity is taxed at your slab rate each year.

Can I withdraw the full amount if I exit NPS before 60?

On a premature exit before 60, PFRDA requires that at least 80% of the corpus be annuitised, with only up to 20% available as a lump sum, unless the corpus is Rs 2.5 lakh or less, in which case the whole amount can be taken as a lump sum. This is far more restrictive than the 40% annuity rule that applies at the normal exit age of 60.