NPS Tier-I Partial Withdrawal: The 25% Rule Retirement Savers Must Know Before Dipping Into Their Corpus

The National Pension System is built to stay locked until you turn 60, but the Pension Fund Regulatory and Development Authority (PFRDA) does allow one controlled escape hatch before then: the Tier-I partial withdrawal. Under PFRDA circular PFRDA/2022/40/ASP-EXIT/04 dated 23 December 2022, a subscriber can pull out a limited slice of their own contributions without shutting the account. The catch is that most savers misread the rule as "25% of my corpus", when in law it is only 25% of what you personally paid in. For a drawdown planner, that single distinction changes the arithmetic by lakhs. This guide walks through the 25% rule, how it stacks up against a full premature exit, the tax treatment under Section 10(12B), and a multi-year worked ledger you can adapt to your own NPS corpus.

The Scheme Explained

NPS Tier-I is a defined-contribution pension account regulated by PFRDA under the PFRDA Act, 2013. Unlike the Public Provident Fund, which carries a government-declared 7.1% rate for the July-September 2026 quarter (Q2 FY 2026-27), NPS has no fixed interest rate at all — the balance rises and falls with the market performance of the pension fund schemes you select across equity (Asset Class E), corporate debt (C), government securities (G), and alternatives (A). Because the return is market-linked, no paragraph in this article can promise a rate; every growth figure below is an explicit assumption, not a guarantee. If you are new to the structure, the Oquilia NPS glossary entry explains the Tier-I versus Tier-II split in plain English.

The partial withdrawal facility applies only to the Tier-I account, never to the voluntary Tier-II wallet. Three hard conditions govern eligibility under the 23 December 2022 circular. First, the first withdrawal is permitted only after three years have elapsed from your date of joining NPS. Second, the maximum you can take is 25% of your own contributions as on the date of the request, explicitly excluding investment appreciation and any employer contribution. Third, the facility can be used a maximum of three times over the entire subscription tenure. Each subsequent withdrawal is capped at 25% of the incremental own contributions made since the previous withdrawal, plus any unutilised balance from earlier eligibility.

The withdrawal is not a free-for-all. PFRDA permits it for six broad purpose categories only: higher education or marriage of children (including legally adopted children); purchase or construction of a residential house or flat in your own name or jointly with your spouse; treatment of specified critical illnesses for self, spouse, children or dependent parents; medical and incidental expenses arising from disability; skill development or re-skilling and other self-development activity; and establishment of your own venture or start-up. The "specified illnesses" list published by PFRDA runs to 13 conditions, including cancer, kidney failure requiring transplant, primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, stroke, myocardial infarction, coma, total blindness, paralysis and any life-threatening accidental injury.

Because the ceiling is anchored to contributions rather than corpus, a growing account actually shrinks the relative size of what you can access. A subscriber whose Rs 6,00,000 of contributions has grown to a Rs 10,00,000 balance can still only touch Rs 1,50,000 — 25% of Rs 6,00,000 — not Rs 2,50,000. This is the single most common miscalculation, and it is why running the numbers through a retirement drawdown calculator before you file the request saves disappointment at the point of need.

Partial Withdrawal vs Premature Exit — The Drawdown Fork

Dipping into NPS before 60 forces a choice between two very different doors. A partial withdrawal keeps the account alive and compounding; a premature exit closes it entirely. For anyone weighing a mid-career cash need against long-term retirement security, the comparison below is the heart of the decision.

The premature-exit maths is punitive by design. If your corpus at premature exit exceeds Rs 2.5 lakh, only 20% can be taken as a lump sum and the remaining 80% must be annuitised, locking the bulk of your savings into a monthly pension you cannot reverse. A partial withdrawal, by contrast, leaves the other 75%-plus of your contributions and 100% of the market growth untouched to keep working toward age 60. For most savers facing a one-off Rs 1-2 lakh need, the partial route is structurally cheaper than surrendering the plan.

Tax on Withdrawal

The partial withdrawal enjoys one of the cleanest exemptions in the pension code. Under Section 10(12B) of the Income-tax Act, 1961, any amount received by a subscriber from the NPS Tier-I account on partial withdrawal is exempt from tax, up to 25% of the subscriber's own contributions. Because PFRDA already caps the withdrawal at exactly that 25% figure, a compliant partial withdrawal is effectively 100% tax-free in the year of receipt, whether you are in the old or the new regime.

This is a different exemption from the two others savers often confuse it with. At superannuation on or after age 60, Section 10(12A) exempts up to 60% of the corpus taken as a lump sum, while the mandatory minimum 40% used to buy an annuity is not taxed at the point of purchase. The annuity pension itself, however, is fully taxable as income under the head "Salaries" or "Income from Other Sources" at your slab rate in each year of receipt — there is no exemption on the monthly payout. The annuity glossary entry sets out how that stream is treated.

A word on the deduction side, because it drives so many NPS decisions. Section 80CCD(1B) is not available in the new tax regime; its additional deduction of up to Rs 50,000 can be claimed only in the old regime. So a subscriber who has opted for the new slabs (which run from a nil rate up to Rs 4,00,000 to 30% above Rs 24,00,000 for FY 2025-26) gets no 80CCD(1B) benefit at all, because 80CCD(1B) is not allowed in the new regime. Employer contribution under Section 80CCD(2) remains deductible in both regimes, up to 14% of basic salary plus dearness allowance following the Budget 2024 change. None of these deductions affect the withdrawal exemption, which stands on Section 10(12B) alone.

Worked Drawdown

Consider Meera, who joins NPS Tier-I in April 2026 at age 32 and contributes Rs 60,000 of her own money each year (Rs 5,000 a month). The table tracks only her own contributions, because that — not the market value — is the base for the 25% ceiling. Any employer share and all investment growth are deliberately excluded from the eligibility column, exactly as the 23 December 2022 circular requires.

*At age 47 the ceiling is 25% of the Rs 4,20,000 incremental own contributions since the last withdrawal (Rs 1,05,000) plus the Rs 20,000 unutilised eligibility carried from the age-40 tranche, totalling Rs 1,25,000.

Three observations flow from Meera's ledger. First, across 23 years she withdraws a total of Rs 3,25,000 — every rupee of it exempt under Section 10(12B), because each tranche stays within the 25% band. Second, she uses exactly three withdrawals, hitting the lifetime cap; a fourth request would be rejected, so the age-55 draw is her last chance before superannuation. Third, and most important for drawdown planning, her account never closes: the roughly Rs 10,55,000 of contributions she leaves in, plus all market growth, continues compounding toward her age-60 exit.

Now contrast the alternative. Had Meera instead taken a premature exit at age 47 with, say, an Rs 14,00,000 market corpus, PFRDA rules would have forced 80% — Rs 11,20,000 — into a compulsory annuity, leaving only Rs 2,80,000 as a lump sum and permanently terminating her PRAN. The partial-withdrawal route gave her the Rs 1,25,000 she actually needed while preserving the compounding engine. To model your own version of this fork, the Oquilia annuity-versus-SWP calculator lets you compare a locked annuity against a self-managed drawdown, and the safe withdrawal rate glossary entry frames how much a preserved corpus can sustainably fund later.

The discipline point is worth stating plainly: because the ceiling is a percentage of contributions and resets only on fresh contributions, the fastest way to rebuild withdrawal headroom is simply to keep paying in. A subscriber who stops contributing after a withdrawal freezes their future eligibility at zero incremental, which is why advisers treat the partial-withdrawal facility as a bridge, not a tap.

FAQ

Can I withdraw 25% of my total NPS balance?

No. The 25% ceiling applies to your own contributions only, not the total balance. Under the PFRDA circular dated 23 December 2022, investment appreciation and employer contributions are excluded from the base. If you contributed Rs 4,80,000 that has grown to Rs 7,00,000, your maximum partial withdrawal is Rs 1,20,000 (25% of Rs 4,80,000), not Rs 1,75,000.

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

A maximum of three times over the entire subscription tenure. The first is permitted only after three years from your date of joining NPS, and each later withdrawal is limited to 25% of the incremental own contributions since the previous one, plus any unutilised eligibility carried forward.

Is the NPS partial withdrawal taxable?

No. Section 10(12B) of the Income-tax Act, 1961 exempts partial withdrawals up to 25% of the subscriber's own contributions, and since PFRDA caps the withdrawal at exactly that level, a compliant withdrawal is fully tax-free in the year of receipt, in both the old and new regimes.

What are the valid reasons for an NPS partial withdrawal?

Six categories: higher education or marriage of children; purchase or construction of a residential house; treatment of specified critical illnesses (a list of 13 conditions including cancer and kidney failure); disability-related medical expenses; skill development or self-development; and establishing your own venture. A withdrawal for any other reason is not permitted.

Is a partial withdrawal better than closing my NPS account early?

For a one-off cash need, usually yes. A partial withdrawal keeps the account open and takes only 25% of contributions tax-free, whereas a premature exit before 60 forces 80% of the corpus into a compulsory annuity if the corpus exceeds Rs 2.5 lakh and permanently closes the PRAN.

Does the additional Rs 50,000 NPS deduction apply if I withdraw?

Section 80CCD(1B) is not available in the new tax regime; the additional deduction of up to Rs 50,000 is a contribution-side benefit that can be claimed only under the old regime, and it is unrelated to withdrawals. Your withdrawal exemption rests separately on Section 10(12B).

Can I take a partial withdrawal within the first three years of joining?

No. The 23 December 2022 circular requires a minimum of three years from your date of joining NPS before the first partial withdrawal. If your urgent need arises earlier, the only route out is a premature exit, which triggers the 80% annuitisation rule for corpuses above Rs 2.5 lakh.