NPS Withdrawal, Contribution: Income Tax Changes That Will Impact You

Finance Minister Arun Jaitley in Union Budget for 2017-18 has given some boost to NPS or National Pension Scheme by proposing to change tax laws. Early withdrawals to the extent of 25 per cent of the contributions will not attract income tax. In another change, the finance minister proposed to bring parity on tax benefits enjoyed by salaried NPS subscribers and self-employed individuals.

These amendments will be applicable from next financial year, which starts on April 1, 2017 (assessment year 2018-19). Financial experts have welcomed the changes. "Both the changes done for NPS were much needed," said Manoj Nagpal, CEO of Outlook Asia Capital.

According to the current tax laws, withdrawals from the NPS are tax exempt if subscribers withdraw up to 40 per cent of the corpus when they reach 60 years of age. Also, up to 60 per cent of the maturity corpus can be withdrawn as lump sum at the age of 60 and the remaining amount has to be converted into annuity. If the subscriber exits NPS before 60 years of age, then only up to 20 per cent of the corpus can be withdrawn and the rest is converted to annuity.

Early withdrawals

Under the current rules, subscribers after 10 years become eligible for partial withdrawal under specific circumstance like children's higher education or marriage, construction or purchase of house and treatment of critical illness (for self, spouse, children or dependant parents). Early withdrawal is allowed up to 25 per cent of one's contribution. Further, the subscriber is allowed to withdraw a maximum of three times during the entire tenure of subscription under NPS and not less than a period of five years shall have elapsed from the last date of each of such withdrawal.

According to the proposed tax rules, early withdrawals will be exempted from tax.

Mr Nagpal of Outlook Asia Capital also said early withdrawal from Tier I (either partial or at closure) is only exempt from tax up to the said limits for an "employee" as per the current Finance Bill. This would imply that self-employed don't get any tax-free withdrawal and the Income Tax Act needs to be clarified by replacing the word "employee" with the word "subscriber", he added. "We have submitted a representation to the finance ministry in this regard."

Tax benefit parity

"In order to provide parity between an individual who is an employee and an individual who is self-employed, it is proposed to provide that the self-employed individual shall be eligible for deduction up to twenty per cent of his gross total income in respect of contribution made to National Pension System Trust," the finance minister said in his Budget speech.

According to the current rule, up to 10 per cent of salary deducted by employer towards NPS is allowed for Section 80C benefits up to Rs 1.5 lakh. In addition, up to 10 per cent of the basic salary contributed into the NPS by the employer on behalf of the employee is deductible without any limit. However, for self-employed people, the limit was only 10 per cent of their income under Section 80C. To provide parity, the self-employed individuals will now be eligible for deduction up to 20 per cent of his/her gross total income as part of the Rs 1.5 lakh that is allowed under Section 80C.

In Budget 2016, the finance minister had announced an exclusive deduction of Rs 50,000 for under Section 80CCD (1B) over and above the limit of Rs 1.5 lakh currently available under Section 80C of the Income Tax Act.

Referring to the Finance Bill 2017, Mr Nagpal also said "there is no clarity yet on tax treatment on withdrawal from NPS Tier II account which should be done quickly".