The National Pension System (NPS) is a popular investment scheme available to the citizens of India for generating pension income in one’s retirement years.

The scheme also offers one single deduction in the new tax regime – the employers’ contribution under Section 80 CCD(2) of the Income-tax Act, 1961. Notably, the tax benefits are different on NPS deposits in the old and the new tax regimes, but they are the same on withdrawals.

National Pension System (NPS)

NPS is a market-linked social security scheme that aims to offer financial security to people after retirement or in their old age. Anyone aged 18-70 years of age can enter into the scheme as part of their retirement planning and also for saving tax by way of investment. Making deposits in the scheme is easy and can be done online as well as offline.

Likewise, withdrawal is also easy, and more importantly, the tax benefits are the same, whether one has deposited through the old or the new tax regime.

Here’s how NPS is taxed at the time of withdrawal.

Also Read: Convert Your NPS Corporate Account To NPS All-Citizen Account: Here’s How To Do It

NPS Withdrawal Rules

The Pension Fund Regulatory and Development Authority (PFRDA) made several changes to NPS since it was made available to all citizens of India in 2009. Its aim is to make NPS more flexible to suit people’s financial needs in retirement.

This includes partial withdrawal for emergency needs, such as for children’s higher education and wedding, medical treatment for self or family, loss of income due to incapacitation, constructing a residential house, skill development, and starting one’s venture.

Notably, partial withdrawal is allowed only up to 25 per cent of the subscriber’s own contributions, and only when the NPS account is at least three years old.

Otherwise, one can withdraw funds at retirement or on turning 60 years old. At this age, 60 per cent of the accumulated corpus can be withdrawn tax-free, and the remaining 40 per cent has to be mandatorily used for buying annuities from an insurer. The 60 per cent withdrawal can either be in lump sum or through a systematic withdrawal plan (SWP).

Also Read: NPS Withdrawal Forms: Know Which Form You Will Need To File Based On Your Requirements

Taxation On NPS Withdrawal

Here is how NPS is taxed upon withdrawal.

Partial Withdrawal (Section 10(12B)): The Finance Bill 2017 proposed certain changes under Section 10(12B) of the Income-tax Act, 1961. Under Section 10(12B), effective from April 1, 2017, up to 25 per cent of the subscribers’ contribution to NPS is eligible for tax exemption on partial withdrawal as per the terms and conditions specified by PFRDA.

Superannuation (Section 10(12A)): This section applies at the closure of the NPS account at superannuation or on attaining the age of 60. Under this section, one is eligible to withdraw up to 60 per cent of the total corpus. This withdrawal is fully tax-exempt.

Annuity (Section 80CCD(5)): The remaining 40 per cent of the total corpus at superannuation that has to be used for buying annuities is fully tax-exempt under Section 80CCD(5) of the Income-tax Act, 1961. However, the income received periodically from the annuity will be subject to tax.

These rules are for investment in Tier I of the NPS account, which enjoys tax benefits at the time of deposit.