Indranil Bhoumik/Mint
Indranil Bhoumik/Mint

NPS gets tax breaks, parity for subscribers

The Budget has proposed tax exemption for partial withdrawals and brought in parity among employees and self-employed subscribers for tax deduction

The Union Budget 2017-18 provided relief to subscribers of the National Pension System (NPS) on at least two counts.

First, the Budget has proposed that partial withdrawals of up to 25% of the contributions will not be taxed. Second, the government has brought the NPS schemes for employees and self-employed individuals on a par, in terms of deductions under section 80CCD of the Income-tax Act, 1961.

The explanatory memorandum for the Finance Bill 2017 states that for employee subscribers of NPS, a partial withdrawal of up to 25% of the corpus would be exempted from tax, which is in addition to the exemption of 40% of the corpus at the time of withdrawal.

“In order to provide further relief to an employee subscriber of NPS, it is proposed to amend the section 10 (of the income-tax Act) so as to provide exemption to partial withdrawal not exceeding 25% of the contribution made by an employee in accordance with the terms and conditions specified under Pension Fund Regulatory and Development Authority Act, 2013 and regulations made there under," the memorandum to the Finance Bill 2017 stated.

However, this will come into effect from April 2018, and thus will be applicable for the assessment year 2018-19.

At present, NPS has a tax treatment of exempt, exempt, tax (EET). This means that your money at the stages of contribution and accumulation is exempt from tax, but at the time of withdrawal, you need to pay a tax on it. As your corpus—principal plus return—is taxed at the time of withdrawal, your returns from such instruments come down, depending on your tax slab.

The government had, earlier, made withdrawals from the NPS tax exempt if the subscribers withdraws up to 40% of the corpus at maturity, which is when the subscriber reaches 60 years of age.

NPS being a market-linked annuity product, up to 60% of the maturity corpus can be withdrawn as lump sum on maturity, at age 60, and the remaining amount has to be converted into annuity.

If the subscriber exits NPS before the age 60, then only up to 20% of the corpus can be withdrawn and rest is converted to annuity.

“It is specified that the benefit is available to an employee. However, it needs to be examined if withdrawals by the non-salaried will also get this benefit," said Sandip Shrikhande, chief executive officer, Kotak Mahindra Pension Fund Ltd.

Moreover, it should be noted that this withdrawal is allowed only for the contribution, and not on corpus. “The employee is allowed to withdraw 25% of the amount of his/her own contribution to the NPS," said Prakash Praharaj, a Securities and Exchange Board of India (Sebi) registered investment adviser.

What is partial withdrawal

Subscribers are eligible to withdraw up to 25% of their contributions from their pension fund accounts under certain circumstances, after 10 years. These circumstances can be: for children’s higher education or marriage, construction or purchase of first house, and treatment of critical illness for self, spouse, children or dependant parents. Thirteen critical illnesses have been defined for this purpose.

Partial withdrawals can also be made in the event of accidents or life-threatening ailments. You can make up to three withdrawals during the tenure, with a gap of 5 years between each (not applicable for critical illnesses).

In the case of corporate NPS, where your employer also contributes, you can withdraw only from your contributions.

Withdrawal process

You need to fill up the withdrawal form and submit it to your point-of-presence (PoP). PoPs, which include most big banks, are NPS distributors. In the form, you will need to mention the percentage that you want to withdraw, and the reason for withdrawal, along with some proof to support your request.

The PoP is responsible for ensuring that the request is genuine and that your bank account details are correct. Once satisfied, it will send your form to the central record keeping agency (CRA) of NPS for processing the payment. PoPs have to send the request within 3 working days of receiving the request and documents. In the case of a medical emergency, it has to be processed within one day. Once the request is registered with the CRA, funds will be transferred to your account on a T+3 basis (T is the date of request receipt). At present, partial withdrawal requests can come only through PoPs. The online module for this is under process. So, if you opened an NPS account online, you need not worry, as you can withdraw only after 10 years, and by then the online facility is likely to be available.

Parity for subscribers

For self-employed individuals who are part of the NPS, the budget has proposed that they would be eligible for a deduction of up to 20% of gross total income. Currently, this is capped at 10% and the move will bring parity between employee subscribers of the NPS and the self-employed subscribers.

According to the existing provisions of section 80CCD, employees or other individuals are allowed a deduction of up to 10% of salary in case of an employee or 10% of gross total income in case of other individuals. However, further deduction of another 10% is allowed to employees in respect of contributions made by their employer. Thus, in case of an employee, the deduction allowed under section 80CCD adds up to 20% of the salary, whereas in case of other individuals, the total deduction under section 80CCD is limited to 10% of gross total income. These deductions are part of the Rs1.5 lakh that is allowed under section 80C.

“It is estimated that there are around 2 million non-salaried persons filing returns of over Rs5 lakh. This will immensely benefit them," Shrikhande said.

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