Is withdrawals from NPS account taxable in the hands of individuals

Central government has introduced NPS or national pension scheme to provide old age income after retirement.

In National Pension Scheme, account can be opened either by visiting POP-SP or through e-NPS. All most all leading banks and India post are authorized to act as a POPs for NPS.

As discussed in our earlier article, periodic contribution to the NPS account is allowed as tax deduction under section 80CCD.

In this article we will be discussing taxation issues related to the corpus amount in NPS account at the time of withdrawal.

Tax exemption on withdrawals from NPS account

As per section 10(12A), returns generated on contributions to NPS account during the accumulation phase is exempted from tax.

However, terminal benefit at the time of exit or superannuation, in the form of lump sum withdrawal from the NPS account is taxable in the hands of the individual in the year in which its received.

You can withdraw up to 60% of the maturity corpus at the age of 60 and remaining portion has to be converted into annuity.

Amount invested in annuity is fully exempted from tax.

Based on recent amendments to section 10(12A), with effect from financial year 2016-17, you can claim 40% of the total amount payable on closure of account or on opting out of the scheme as exemption out of the total amount received.

For instance, if total corpus in Tier I account at the age of 60 years is Rs 8,00,000, then you can withdraw Rs 3,20,000 (40% of Rs 8,00,000) from it without paying any tax. Balance amount should be invested in a annuity plan. As amount invested in annuity is also exempted, in this way you are not required to pay any tax.

However, annuity income received in the subsequent years from such plan will be subject to income tax.

Please note, the whole amount received by the nominee on the death of the account holder shall be exempted from tax.

On certain occasions like children’s marriage, higher education, medical treatment or construction of a house, partial withdrawal is allowed from from National Pension Scheme’s Tier I account.

On partial withdrawal, an amount not exceeding 25% of the amount of contribution made by the employee shall be exempted.

No tax benefits is available on investment towards Tier II NPS account.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.