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Is amount withdrawn from NPS taxable?

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  • As per the provisions of section 10(12A) of the Income-tax Act, 1961, any withdrawal from the NPS Trust is exempt up to 60% of the total amount payable at the time of closure of the account or on opting out of the pension scheme

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I received a sum of 200,584 on withdrawal of the total accumulated corpus  from my tier-1 account of the National Pension System (NPS). The amount was withdrawn in lump sum without any annuity being purchased on 22 April 2021. 

Is withdrawal of the accumulated corpus of up to 2 lakh totally tax free? Am I eligible for any tax exemption? If not, what is my tax liability?

—Name withheld on request

 

As per the provisions of section 10(12A) of the Income-tax Act, 1961, any withdrawal from the NPS Trust is exempt up to 60% of the total amount payable at the time of closure of the account or on  opting out of the pension scheme.

Based on the limited facts of the case, it is presumed that you have withdrawn the accumulations under NPS tier-I account at the time of superannuation  or after attaining 60 years of age. Thus, 60% of the total amount payable under NPS scheme would be considered as tax free in your hands. The balance 40% of the amount will be considered as taxable income in your hands at the slab rates applicable to you for FY 2021-22.

 

I got 7 lakh as joining bonus with a three year lock-in period when I took up employment with a multinational company (MNC). The company even deducted tax at source on this bonus amount in March 2021. 

However, I decided to quit the MNC in February 2022 and returned the entire bonus amount to the firm. Can I now claim the money paid as income tax on the bonus? 

                      —Saransh Nagaich

 

We understand that you had received the joining bonus from the company in FY 2020-21 and accordingly appropriate taxes have been deducted by the company on the same. Further, at the time of leaving the company in FY 2021-22, you had returned the entire joining bonus amount due to non-completion of the lock-in period.

As per the provisions of the Income-tax Act, 1961, the joining bonus received by you in respect of your employment is taxable as salary income in the year of receipt, and accordingly the same has correctly been taxed in FY 2020-21.

However, in case such a bonus is returned, there is no specific provision in the Act which allows for any reduction or deduction from the salary income. 

Generally, where the requirement to return such bonus arises, basis the contractual terms agreed between employer and employee for non-fulfilment of conditions by the employee, there is a view that it is not an over-riding title on the income but in the nature of a penalty for non-fulfilment of stated terms. Hence, no deduction should be available from the taxable income in this regard and the tax already paid on bonus income should not be eligible for refund.

The tax implications would however depend upon the terms of the contract, agreement between employer and employee, company policy and detailed evaluation of the exact facts of the case.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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