The National Pension System (NPS) is a voluntary social security instrument by the government. This pension scheme is open for employees from private, public, and unorganized sectors. This scheme encourages you to invest in the pension account at periodic intervals during your employment. Post retirement, you as a subscriber can avail a specific percentage of corpus. As an account holder of NPS, you would get the rest of the amount as a fixed monthly pension to meet your retirement needs.
Previously, NPS schemes covered just Central Government employees. However, later, PFRDA (Pension Fund Regulatory & Development Authority) made NPS available to all citizens voluntarily. The fund schemes are portable across locations and jobs with tax benefits allowed as per Section 80C. Read on to understand NPS tax benefits and if withdrawal amount on NPS is taxable.
Tax implications on NPS
NPS withdrawal is allowed by the PFRDA on exit or closure during maturity, partial withdrawal on purposes like construction of home/purchase of property, treatment of critical/terminal ill (Covid19 also included), children’s higher education fees, children’s marriage or skill development course undertaken by the subscriber. Note that partial withdrawal in NPS scheme is tax free, which is permitted after three years lock-in period and up to 25 per cent of the individual voluntary contribution amount. Also, remember that you are permitted to make a maximum of three NPS partial withdrawals during your entire subscription tenure.
On NPS maturity i.e., upon reaching the age of retirement, you can withdraw up to 60 per cent as lumpsum and the remaining 40 per cent must be used mandatorily for purchasing annuity. According to income tax laws, the 60 percent lumpsum withdrawal of NPS corpus at the retirement age is tax free. The rest 40 per cent apportioned for purchase of annuity is without any GST component. Currently, PFRDA revised NPS withdrawal rules on maturity wherein it permits you to withdraw 100 per cent in lumpsum form if the NPS corpus value is Rs 5 lakh or below.
NPS as a financial instrument, like other financial instruments offers tax benefits. NPS tax benefits can be claimed as per Section 80 CCD (1B), Section 80 CCD (2) and Section 80 CCD (1).
- Section 80 CCD (1) falls under Section 80 C, which covers self-contribution. You as a salaried professional can claim a maximum tax deduction of up to Rs 1.50 lakh.
- Section 80 CCD (2) also falls under Section 80 C, which covers the contribution of your employer towards NPS. Maximum amount for deduction is either 10 per cent of basic salary and dearness allowance or employer’s NPS contribution with monetary capping of Rs. 7.5 lakhs which includes employer’s contribution to employee’s provident fund + superannuation fund contribution + NPS employer contribution.
- As per Section 80 CCD (1B), you can claim additional deduction of Rs 50,000 as tax benefit on NPS. This tax deduction is over and above the deduction of Rs 1.50 lakh available as per Section 80 C.
Thus, you can claim a tax benefit of up to Rs 2 lakh on NPS.
All the above tax benefits are exclusive to each other represented by different tax sections.
NPS is a prudent investment option for risk-averse investors, and it has the potential to meet major fund generation need of post retirement life as well as offer tax benefits. If you wish to get the most out of NPS tax benefits, it is recommended to begin your investments early and even review carefully all the deductions on tax linked with NPS contributions.