Decoding Taxation on National Pension Scheme (NPS)
Article originally published in Gujarati Mid-day newspaper on May 11 and May 25, 2021. The original article is published in a 2 part series. Here is the English transcript of Part 2.
Withdrawal Norms from NPS and its Tax Treatment
Now, we shall discuss the withdrawal/exit from NPS and related taxation. NPS is typically a retirement product and hence the rules are framed such that it returns in form of pension income to retirees and not only available as a one-time corpus. Accordingly, the full corpus accumulated in NPS cannot be withdrawn at one time.
If the subscriber has joined the NPS between 18-60 years, on attaining 60 years or superannuation (as per service rules), at least 40% of the corpus is utilized for the purchase of an annuity and the remaining 60% may be withdrawn as a lump sum. Amount invested in the purchase of annuity and lump sum withdrawal are fully exempt from tax. However, annuity income (Pension) will be subject to income tax as per the investor’s slab. However, the scheme also gives an option to defer the withdrawal up to 70 years of age. Various other options such as deferment of annuity purchase up to 3 years, withdrawal in 10 instalments, a continuation of contribution up to 70 years are also available. If Corpus is less than Rs. 2 lakhs the entire amount can be withdrawn tax-free. If the subscriber has joined the NPS between 60-65 years, the subscriber can exit after the completion of 3 years. Other provisions being largely similar.
Before attaining 60 years or superannuation, an investor in the NPS can avail of premature exit after 10 years from the date of opening the account wherein 20% of the corpus can be redeemed. 80% of the corpus will be utilized in the purchase of an annuity. The redemption amount and amount invested in the purchase of annuity are fully exempt from tax. However, annuity income (Pension) will be subject to income tax as per the investor’s slab. In this case, if the corpus is less than or equal to Rs.1 lakh the entire amount can be withdrawn tax-free. If the subscriber has joined the NPS between 60-65 years and wants to exit before the completion of 3 years, similar provisions as explained above would apply.
The National Pension Scheme also offers the facility of partial withdrawal where in the entire lifetime, the investor is entitled to three partial withdrawals from the account. Partial withdrawal is allowed only in certain specified cases, for example, higher education of children, marriage of children, for the purchase/construction of the residential house, for treatment of critical illnesses, etc. The first partial withdrawal can be done three years after the account is opened. There should be a minimum gap of five years between two withdrawals. Each partial withdrawal should not exceed 25% of the investor’s own contribution to NPS. Partial withdrawal is tax-exempt.
In the case of the death of the investor, the nominee / legal heir can claim the corpus. Full withdrawal by the nominee / legal heir is allowed and remains tax-free. Nominee / Legal heir can opt to purchase an annuity from this accumulated wealth. The pension income would be taxed as per the nominee / legal heir’s income tax slab.
I had started investing in NPS in April 2017 when I was 25 years old. Now, I want to make a partial withdrawal for the purchase of a Residential house. My contribution to NPS is 2,00,000 and accumulated corpus is Rs 3,00,000. Can I withdraw the amount and will it be taxable?
Partial withdrawal from NPS is allowed after completion of 3 years for specified reasons. Purchase of a residential house is one of the specified reasons as per NPS rules and it’s been more than 3 years since you opened the NPS account hence you will be able to withdraw 25% of your own contribution to NPS. The total amount you can withdraw is Rs 50,000 (25% of Rs 2,00,000 i.e 25% of your own contribution and not the accumulated corpus).