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Budget 2016 - Withdrawal from NPS on maturity made tax-free upto 40%

 In Budget 2016, the finance minister has made withdrawals from NPS on maturity tax free upto 40% of the total corpus accumulated. Currently, none of the withdrawals were tax-free unlike other competing instruments such as PPF and EPF where the total withdrawal was tax -free. This is a major step towards making the NPS scheme more attractive and bringing it on par with the other EEE pension schemes. 

This has implicitly made it attractive for investors to withdraw the corpus after 60 years (and not before) as any withdrawal before 60 years requires the utilisation of 80% of the corpus for purchasing annuity. This means that only 20% can be withdrawn before 60 years. Hence for getting the maximum tax benefit, it seems prudent to withdraw after 60 years. This is because after 60 years you can withdraw upto 60% of the corpus and out of this as per the new proposal 40% will be tax-free. 


As per current tax laws, under Sections 80 CCD (1) and 80CCE an investment of up to 10% of Basic Pay plus Dearness Allowance or a maximum of Rs 1.5 lakh, whichever is lower, is deductible from gross taxable income. A self employed person can also claim tax deduction up to 10% of his gross income under Section 80 CCD (1) within the overall ceiling of Rs 1.5 lakh under Section 80CCE. However, the total deduction from gross taxable income that can be claimed is capped at Rs 1.5 lakh under Section 80CCE. However, the total deduction from gross taxable income that can be claimed is capped at Rs 1.5 lakh for all investments under Section 80CCE which includes investments under section 80C. 

National Pension System (NPS) is a voluntary defined contribution retirement savings scheme. On turning 60, an investor can exit from the NPS but 40% of the pension wealth has to be utilised for purchase of an annuity. If an investor withdraws the corpus before reaching 60 years of age, he will have to invest 80% of the accumulated corpus for buying an annuity. These exit conditions only apply to NPS Tier I account which is a pre-requisite for having a Tier -II account in NPS. 

For an NPS investor in the highest tax bracket, this currently means that almost one third of the corpus is eroded by way of tax. The amount that is used to buy the annuity is however not subject to tax. This means that if an investor uses 100% of the accumulated corpus for buying an annuity then he won't be subject to taxation. Only the pension income that he gets will be taxed like any other pension. 

 
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