NPS Withdrawal Becomes Effectively Tax-Free After Budget 2019

On Friday, FM Nirmala Sitharaman announced that the Finance Bill 2019 will give effect to the cabinet decision of increasing the limit of exemption on final withdrawal from National Pension Scheme (NPS) from current 40 percent to 60 percent of the payment.

The bill will also allow a deduction of up to 14 percent of salary for the employer's contribution from the current 10 percent and deduction under section 80C for a contribution made towards Tier II NPS account. The two changes will be effective for the central government employees only.

The increase in exemption limit is encouraging for NPS subscribers as this makes it almost at par with EPF (Employees' Provident Fund). While EPF has an EEE (exempt-exempt-exempt from tax on contribution-interest earned-withdrawal) status, NPS has EET status, that means withdrawals are partially taxable.

In December, the Union Cabinet had approved a proposal to increase tax exemption limit for lump sum withdrawal on exit from NPS to 60 percent. However, this was not officially notified. Now that is has become a part of the finance bill, if passed in the Parliament, the scheme will become effectively tax-free.

At present, the limit is set at 40 percent of the accumulated corpus at the time of retirement and the balance 20 percent was taxable. The rest is used to purchase annuity.