The latest Union Budget has made significant tax concessions for withdrawal from NPS corpus at the time of retirement. In this post, I will discuss these budget proposals pertaining to NPS.
Please understand this is my initial understanding of the budget proposal. I will update the post as I develop better clarity.
Up to 40% of accumulated corpus exempt from Income Tax
In the latest budget proposal, 40% of the accumulated NPS corpus has been made exempt from income tax. This is a significant move.
NPS used to fall in Exempt-Exempt-Tax (EET) category. With this move, at least a part of the accumulated corpus is exempt from income tax. So, with this move, NPS lies somewhere between EET and EEE category.
Please note the tax exemption is only for the withdrawal at the time of retirement. If you withdraw before retirement, this exemption is not available.
So, of the accumulated NPS corpus at the time of retirement,
- 40% of the corpus is exempt from income tax. You can withdraw this amount lump sum and will have to pay zero tax.
- 40% of the corpus must be mandatorily converted to annuity. Annuity (or pension) income will be taxed in the year of receipt. You will be taxed at marginal income tax rate (income tax slab) on this annuity income.
What happens the remaining 20%?
For the remaining 20%, you have multiple options.
You can either choose to purchase annuity for this amount too. If you opt for annuity, annuity will be taxed in the year of receipt (as mentioned in point b).
Alternatively, you can withdraw this 20% along with the 40% (which is exempt) at the time of retirement. So, essentially, you withdraw 60% lump sum at the retirement. As the rule goes, only 40% is exempt. You will have to pay income tax on the remaining amount. This is a bad idea.
You have a way out. As I had discussed in one of my earlier posts, there is an option to withdraw from NPS in up to 10 annual (not necessarily equal) installments. You can withdraw this amount over the next 10 years as and when you need (or in the years where you tax liability is lower).
Must Read: Should you invest Rs 50,000 for the extra tax benefit?
Additional Read: Common Doubts about NPS
Additional Read: NPS tax benefits and tax treatment at maturity (Revised After Union Budget)
Do note some of the aforementioned posts are dated. I will update these posts in due course of time.
If you withdraw from NPS before retirement, you can only withdraw 20% as lump sum and the remaining 80% is to be mandatorily used to purchase annuity plans. The latest proposal will also discourage investors from exiting from NPS before retirement.
Reduction in Service Tax
Since 40% of the accumulated corpus has to go towards purchase of annuity, there is an additional move in the budget proposal that is beneficial to investors. Annuity services provided by National Pension System (NPS) have been made exempt from income tax.
This will improve periodic annuity income to a certain extent. Earlier, the applicable service tax rate was 3.5%.
Tax Treatment in the event of death of NPS Subscriber
In the event of demise of NPS subscriber, the entire NPS amount (drawn as lump sum) shall be exempt from Income Tax.
As I understand, the exemption is only for lump sum withdrawals in the event of demise of NPS subscriber. In the nominee chooses to purchase annuity (or has to purchase annuity as per NPS rules), the annuity income will be taxable in the year of receipt.
Portability from EPF (or recognized provident fund) to NPS
As one time exemption, you can port your EPF investments to NPS without attracting any tax. This is useful for such investors who want to switch from EPF to NPS.
You will need a lot of support from your employer in this matter.
PersonalFinancePlan Take
With the latest proposals in the budget, the case of NPS is quite strong at least from the taxation viewpoint. Before these moves, NPS was essentially tax deferral. However, now, you can see some serious tax benefit from investing in NPS.
17 thoughts on “40% of NPS maturity amount is exempt from Income Tax”
Hi Deepesh,
So now investing in NPS wil be more beneficial than before from taxation point of view.
EPF is also goimg to be treated in same 40% way like NPS…but what about withdrawls w.r.t. PPF ? Could u find anything about PPF ?
Dear Biswadeep,
PPF remains as it was before. It remains EEE.
Do not want your hard earned EPF / PPF to be taxed ?
Give a blow by signing this petition –
https://www.change.org/p/finance-minister-of-india-dear-fm-withdraw-budget-2016-proposal-to-tax-ppf-epf
Do not forget to share on Whatsapp, Email, Facebook & Twitter.
Hi Deepesh, in NPS after 40%, the remaining 60% will be taxed or just interest component of 60%?
Hi Amit,
You must purchase annuity for atleast 40% of the accumulated corpus. No tax on this amount upfront. However, annuity will be taxed in the year of receipt.
Additionally, 40% of accumulated corpus can be withdrawn lump sum and won’t be taxed.
Any lump sum withdrawal in excess of 40% will be taxed. Entire such amount will be taxed (and not just returns).
Suggest you go through the following post. It has discussed many possible scenarios.
http://www.personalfinanceplan.in/opinion/nps-tax-benefits-and-tax-treatment-at-maturity-revised/
Dear Sir,
This 40% exemption is for all NPS account holders or only for Government employees and some Private Sector employees who have NPS ?
I have NPS account and contribute voluntarily.
Dear Pradeep,
This is for everyone. You will get this benefit too.
Dear Sir,
On maturity, 40 % of the withdrawal is exempted from income tax. And if I purchase annuity for the remaining 60%, will there be any income tax on upfront…?
Dear Arun,
Then, there will be no tax upfront. You have used entire proceeds to purchase annuity.
However, annuity income will be taxed in the year of receipt.
Hello sir
I want to know about maximum withdrawal from nps regarding to purchase house
And i am state bank employee.
Pls guide me.
My email id suhel.pathan@sbi.co.in
Thanking you
Hi Suhel,
I assume you are talking about premature withdrawals.
There is no maximum limit. The withdrawal amount is capped based on a percentage of your contributions.
Please go through the following post.
http://www.personalfinanceplan.in/opinion/revised-exit-and-withdrawal-rules-for-nps/
Hello Sir,
is it true that prior to recent amendment making a percent (40%) of maturity corpus non taxable for all subscribers of NPS , previously the govt employees, unlike their private counterparts were already being offered an exemption on 50% of maturity corpus of NPS (33% if receiving gratuity). is it true?
does the amended rule since Budget 2015-16 also account for different percentage of non taxable corpus for govt employees?
Thank You In advance.!!
Regards
Dear Sunil,
This was a confusion earlier. I had also mentioned about it in one of my posts.
There is much better clarity now.
Gratuity related taxation is applicable for only defined benefit pension plans.
NPS is defined contribution. Hence, not applicable.
Tax Rules for private and Government subscribers are same.
What is Withdrawn on maturity in Pension Calculator ? Also annuity income will be taxed in the year of receipt means the principle of 40% will also be taxed ?
Dear Abdul,
I am not sure if I got your question correctly.
Annuity income will be taxed in the year of receipt.
40% of the maturity corpus can be withdrawn tax-free.
Hi Deepesh – I do follow many of your Post.
What i understand from your POST above , Correct me if i am wrong ( Y/N) –
a) 1.5 Lac – 80C ( PPF / LIC / etc ) – Exempt
b) Additional 50,000 – under Section 80CCD (1B) – In my Company System(Pvt) i can See only 80CCD (1) and not 80CCD(1B) ; hope its the Same ?? So in my case will i have to Declare entire in 80CCD(1) ??
c) Post Age of 60 = 40% Annuity + 40% Lumpsum +20% ( in Span of 10 years)
d) Before 60 = 20% Lumpsum + 80% Annuity
In some of your Previous Port = you mentioned something like : Total exempt contribution in some particular case were Basic + DA is 4 Lac is as follows:
1. Up to 10% = Rs 40,000 under Section 80CCD(1). Own contribution
2. Up to Rs 50,000 under Section 80CCD(1B). Own contribution
3. Up to Rs 40,000 under Section 80CCD(2). Employer contribution – There is no Contribution from my
Employer – So this in my Case would be 0/-
* But as mentioned in my Company Portal only 80CCD(1) is visible * So will i have to put Value of Rs 90000/- in 80CCD (1) *
So will in my specific case, the total tax benefit for NPS investment in the financial year capped at Rs 90000/ annum.
Even after these investments, I would still have option to invest up to Rs 1.5 lacs for tax benefits under Section 80C
So : Is it like : 1.5 +0.9 = 2.4Lac ( Exempt ? )
Regards
Sunny
Hi Sunny,
a. Right
b. You can show in your income tax return.
c. Right (if that suits you)
1. No. Section 80CCD(1) comes within Section 80C limit of Rs 1.5 lacs.
2. Correct
3. Correct
You can divide while filing return Please talk to a CA)
Since there is nothing under SEction 80CCD(2) for employer contribution, you get tax benefit of Rs 2 lacs.
1.5 lacs for PPF and 50K for NPS under Section 80CCD(1B).