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NPS Deduction: Know The Tax Benefits Of Partial And Lump Sum Withdrawals

As of March 1, 2024, NPS added 7.92 lakh new members, and PFRDA has set a goal of adding one million new users by the end of March 2024.

March 18, 2024
March 18, 2024
NPS

NPS

Subscribers of the National Pension System (NPS) can claim up to Rs 1.5 lakh deductions under section 80 CCD (1) of the Income-tax Act, 1961. Additionally, it offers an exclusive tax benefit of up to Rs. 50,000 for Tier I accountholders under section 80CCD (1B). NPS also provides tax benefits to corporate-sector employees under section 80CCD (2). Under this provision, the employer’s contribution in NPS of up to 10 per cent or Rs 7.5 lakh of the employee’s basic salary plus dearness allowance (DA) is deductible from taxable income under ‘Business Expense’ from their profit and loss account.

To avail of the tax benefits or to make additional contribution to Tier I account, the subscriber can approach any point-of-presence (POP) or visit the eNPS website. However, note the tax benefits are applicable only for investments in Tier I account.

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Investment Proof To Avail Of Tax Benefit

The subscriber can submit the transaction statement for the Tier I account as proof of investment to avail of the tax benefits under NPS. They can download the receipt for the relevant financial year from the sub-menu “Statement of Voluntary Contribution under National Pension System (NPS)”, available under the main menu “View” after logging into the NPS account.

Also read: NPS Funds Register Robust Growth, Driven By 34% Surge In Annual Equity Returns: Report

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Tax Benefits Under NPS Besides 80CCD

Besides tax deductions under 80CCD, NPS provides the following benefits:

Partial Withdrawal: The subscriber can get tax relief under section 10 (12B) of the Income Tax Act for partial withdrawals from the NPS Tier I account for specific purposes.

Annuity Purchase: The amount invested to purchase an annuity plan is fully tax-exempt. However, the income from the annuity in the subsequent years will be subject to tax.

Lump Sum withdrawal: Subscribers can withdraw up to 60 per cent of the corpus tax-free in a lump sum. For instance, if the total corpus is Rs 20 lakh at retirement, the subscriber can withdraw up to Rs 12 lakh, or 60 per cent, tax-free. The remaining 40 per cent of the corpus must be invested in an annuity, and income from subsequent years will be taxed according to the individual tax slabs. Also, note that NPS Tier II accounts do not have tax benefits on investment.

NPS is a popular government-backed small savings scheme for retirement. The government has recently allowed retirees to opt for systematic lump-sum withdrawals (SLW) from Tier I accounts to ensure capital growth and regular monthly income. As of March 2023, NPS had 624.81 subscribers, registering a 22.88 per cent YoY growth. And as of March 1, 2024, it added 7.92 lakh new members. PFRDA has set a goal of adding one million new users by the end of March 2024.

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