NPS vs mutual funds: Know withdrawal rules at age 35

Investors who need retirement savings at age 35 face very different rules under the National Pension System (NPS) and retirement-focused mutual funds. Under the NPS All-Citizen Model, a premature exit before 15 years and before age 60 allows withdrawal of only 20% of the corpus, with at least 80% used to buy an annuity. For a corpus up to Rs 5 lakh, the entire amount can be withdrawn. After 15 years, the rules ease: a corpus up to Rs 8 lakh can be fully withdrawn, for Rs 8 to 12 lakh, up to Rs 6 lakh can be taken immediately, above Rs 12 lakh, up to 80% can be withdrawn as a lump sum, with at least 20% going to an annuity.

NPS also allows partial withdrawals of up to 25% of the subscriber's own contributions after three years, for purposes such as children's education, marriage, buying a house or medical treatment. Up to four partial withdrawals are allowed before age 60, with a four-year gap between them. In contrast, retirement mutual funds typically allow full redemption after their lock-in period ends, with no annuity requirement, though each fresh investment has its own lock-in.

On tax, NPS contributions qualify for deductions under Sections 80CCD(1) and 80CCD(1B) under the old regime, and employer contributions under Section 80CCD(2) under the new regime. Up to 60% of the corpus on exit is tax-exempt, the rest is taxable, and annuity income is taxed when received. Retirement mutual funds do not offer NPS-specific contribution benefits, and gains are taxed under capital gains rules. Experts advise investors to maintain an emergency fund and separate provisions for major expenses before locking money into NPS.