Insertion of Section 10(12A) Finance Act (FA), 2016 was a welcome step by the CBDT to the NPS subscribers wherein 40% of the accumulated NPS corpus was made exempt from income tax on closure of NPS account at the time of withdrawal. Earlier, the entire amount was taxable. CBDT is introducing new provisions in IT Act to provide NPS a level playing field at par with the EPF, superannuation fund and other retiral plans so that it is also seen as tax friendly instrument.
Tax Benefits for investment in NPS
Only contribution to Tier-I NPS account is eligible for income tax benefits.
1. Investment up to Rs 1.5 lacs into NPS in a financial year is eligible for deduction under Section 80CCD (1). Please note this deduction comes under the overall ceiling of Rs 1.5 lacs for deduction under Section 80C.In case of an employee, this deduction is additionally capped at 10% of his salary (Basic + DA). In case the subscriber is self-employed, this deduction is capped at 20% of his gross total income.
2. Up to Rs 50,000 per financial year for any investments into NPS under Section 80CCD (1B). This deduction is over and above the ceiling limit of Rs 1.5 lacs provided under Section 80C.
3. Contribution from the employerup to 10% of Basic Salary + Dearness Allowance is also eligible for deduction under Section 80CCD (2). There is no upper cap (in terms of amount) on this tax deduction. This deduction is over and above the ceiling limit of Rs 1.5 lacs provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B). However, this benefit is available to employees. Self-employed cannot avail this deduction.
Therefore, a maximum of Rs 2 lacs can be claimed as deduction for own investment in NPS. Tax benefit on employer contribution is in excess of aforesaid benefit of Rs 2 lacs.
Tax treatment on Maturity or Withdrawal
1. Withdrawal on retirement
At least 40% of the accumulated wealth in the NPS account needs to be utilized for purchase of annuity/pension. Remaining 60% can be withdrawn as lump sum. 40% of the accumulated NPS corpus is exempt from tax at the time of retirement. So, you can withdraw 40% of the accumulated corpus without paying any tax. If you withdraw more than 40%, you will have pay income tax at your marginal income tax rate.
The amount that you use to purchase annuity (minimum 40%, maximum 100%) is also exempt from income tax. However, the annuity income (pension) shall be taxed in the year of receipt. So, if you use 40% of NPS corpus for lump sum withdrawal and remaining 60% for annuity purchase at the time of retirement, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax.
2. Pre-mature exit from NPS (Exit before Retirement)
At least 80% of the accumulated wealth in the NPS account needs to be utilized for purchase of annuity/pension. Even in this case, lump sum withdrawal up to 40% will be exempt from tax. However, since PFRDA allows only 20% lump sum withdrawal in case of pre-mature exit, the tax benefit will be limited to 20% only. The amount used to purchase annuity is not taxed. However, annuity income shall also be taxed (as per your income tax slab) in the year of receipt.
3. Partial Withdrawal from NPS (without exiting the NPS)
Limited partial withdrawal from NPS is permitted subject to certain conditions. Such partial withdrawals are exempt to the extent of 25% of own contribution from income tax.
4. Staggered withdrawal
In a notification on October 29, 2015, PFRDA clarified that the lump sum amount can be withdrawn in up to 10 annual installments till the age of 70. Please note the installments need not be equal. This is applicable to both Government Sector NPS and All Citizens model (including corporate sector NPS).
Upon retirement, generally other income source is limited and tax rates are fairly less for senior citizens hence the tax impact on NPS withdrawal will be minimum. Further, tax exemption on 40% lump sum withdrawal makes NPS a sweet deal from tax perspective. Moreover, you can optimize your tax liability by staggered withdrawals.
Under the existing provisions of clause (12A) of section 10 of the Act, an employee contributing to the NPS is allowed an exemption in respect of 40 percent of the total amount payable to him on closure of his account or on his opting out. This exemption was not available to non-employee subscribers. In order to provide a level playing field, FA, 2018 has amended the clause (12A) of section 10 of the Act to extend the said benefit to all subscribers. This amendment will take effect, from April 1, 2019, and will accordingly apply in relation to the assessment year 2019-20 and subsequent assessment years.
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