Partial withdrawal from National Pension System (NPS) to the extent of 25% of amount contributed is not taxable

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Partial withdrawal from National Pension System (NPS) to the extent of 25% of amount contributed is not taxable

A new section,Section 10(12B) is introduced in the Inocme Tax Act – 1961 from Assessment year 2018-19 as a result of which any partial withdrawal from NPS to the extent of 25% of amount contributed will not be chargeable to tax.

However, this exemption under section 10(12B) is subject to certain conditions as under:

  1. Exemption is available only to an “Employee” and not to self employer person.
  2. Employee can be an employee of Government sector or a private sector.
  3. Individual should have subscribed to NPS for at least 10 years.
  4. Such individual avails partial withdrawal from NPS to the extent of not exceeding 25% of contribution made to NPS. It may be noted that maximum amount which is allowed to be withdrawn is 25% of the contribution made by the subscriber and not the total amount accumulated amount of the fund. For example, Mr. “Smart” has invested for last 11 years in NPS A/c and total contribution was of Rs. 15,00,000 till 30/09/2020.  This amount of Rs. 15,00,000 lakhs grows into Rs. 34,00,000 till 30/09/2020. Now, if he wants to withdraw some amount then he will be eligible to withdraw up to 25% of the contribution of Rs 15,00,000 and not Rs. 34,00,000/-. In short, Mr. Smart is allowed to withdraw  25% of Rs. 15,00,000 which is is Rs. 4,50,000/-. 
  5. Maximum of 3 withdrawals during the entire tenure are allowed.
  6. Minimum gap of 5 years is required between the two withdrawals. However, this condition shall not apply in case of withdrawal for treatment of specified illness. 

 

Apart from the facility of partial withdrawals exemption as referred above, the overall taxation of withdrawals from NPS is summarized as under:

 

SR. No. Nature of Withdrawals Provisions applicable

(AY 2018-19)

(i) Partial withdrawal from NPS
(To the extent it does not exceed 25% of an employee’s contribution as discussed above)
Exempt
(ii) Amount received by the assessee on closure of account or on his opting out of the NPS Scheme 40% taxable
[Earlier, 60% was taxable up to AY 2019-200]
(iii) Any amount is received by a nominee on the death of the assessee by the legal heir Exempt
(iv) Pension received out of NPS Taxable
(v) As mentioned above, 60% is totally tax free.

For balance 40%, Amount utilized for purchasing an annuity plan in the same previous year can be claimed as exempt.

Exempt
(vi) Pension received out of annuity plan purchased against 40% of the withdrawals amount. Taxable

 

Section 10(12B) of the scheme reads as under:

Section 10 :

(12B) any payment from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to the extent it does not exceed twenty-five per cent of the amount of contributions made by him;

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