The National Pension Scheme is a retirement scheme introduced by the Central Government. People can invest in such pension account regularly and receive the lump sum amount and annuity pension after retirement of attainment of 60 years of age. The regulatory authority allows partial withdrawal from the NPS account. Let us understand the tax implications of partial withdrawal.
Partial Withdrawal from NPS
The Budget 2017 came up with a great respite for those who have invested in National Pension scheme (NPS) or planning to invest in it. Any partial withdrawals from NPS henceforth is tax free. Before this partial withdrawals were taxable. PFRDA (Pension Fund regulatory and development authority) allows the Partial withdrawal from NPS up to 25% of contribution made by subscriber.
However partial withdrawal is allowed subject to fulfillment of certain conditions as below:
- The Partial withdrawal shall be allowed for specific purposes such as higher education of children, marriage of children, purchase or construction of residential house or for treatment of specified diseases.
- Individual should have subscribed to NPS for at least 10 years.
- Maximum of 3 withdrawals during the entire tenure are allowed.
- 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.
The maximum amount which is allowed to be withdraw is 25 % of the contribution made by the subscriber and not the total amount accumulated in the fund.
For instance, you have invested Rs 6 lakhs in the NPS so far. This is your contribution towards the scheme. Let’s assume if after 11 years the Rs 6 lakhs grows into Rs 14 lakhs. And if you want to withdraw some amount, you will be allowed to withdraw up to 25% of the contribution which is Rs 6 lakhs and not Rs 14 lakhs i.e. 25 % of 6 lakhs is Rs 1.5 lakhs.
This amendment will be effective from 01.04.2017.The partial withdrawals made before 1.04.2017 will be taxable.
Tax Treatment on withdrawal from NPS
- Withdrawal on retirement/at the age of 60
Withdrawal up to 40% of the accumulated wealth in NPS is exempt from tax at the time of retirement. However maximum amount that you can withdraw at the retirement is 60% of the accumulated wealth and balance 40% needs to be utilized for the purchase of annuity providing monthly pension to the subscriber.
- Withdrawal from NPS before retirement (irrespective of the cause)
If you want to withdraw from NPS before the age of 60 or before retirement (other than the purpose specified for partial withdrawal), the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS and balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for monthly pension of the subscriber. However the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.
- Withdrawal upon death of Subscriber
The amount withdrawn in the event of death of subscriber shall be exempt from tax. The entire accumulated pension would be paid to the legal heir/nominee of the subscriber. However in case of govt employees, the entire amount cannot be withdrawn. Purchase of annuity plan is mandatory by the nominee.
- 100% withdrawal at the time of retirement/attaining the age of 60
In case the total corpus in the account is less than Rs. 2 Lakhs as on the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the subscriber (other than Swavalamban subscribers) can avail the option of complete Withdrawal.
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