Withdrawals from NPS or National Pension Scheme to get tax-free status soon. The government in Budget 2019 proposals, increased the income tax exemption limit on withdrawal from NPS to 60%, from 40% on exit from the scheme, effectively making withdrawal from the pension scheme 100% tax-free.
"Under the existing provisions of Section 10 of the Act, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme, to the extent it does not exceed 40% of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax. With a view to enable the pensioner to have more disposable funds, it is proposed to amend the said section so as to increase the said exemption from 40% to 60% of the total amount payable to the person at the time of closure or his opting out of the scheme," says the Finance Bill 2019.
The Union Cabinet had last year approved an increase in income tax exemption limit for lump-sum withdrawal on exit from National Pension Scheme (NPS), effectively making withdrawal from the pension scheme 100% tax-free. But it was not yet notified.
Currently, NPS enjoys exempt, exempt and taxable or EET status, meaning that on withdrawal NPS was partially taxable.
In the December meeting, the Union Cabinet had approved a proposal increasing income tax exemption limit for lump sum withdrawal on exit from NPS to 60%. This effectively made the entire withdrawal from NPS exempt from income tax.
Currently, 40% of the total accumulated corpus utilised for purchase of annuity is already tax exempted. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable.
Employee Provident Fund or EPF and Public Provident Fund or PPF currently enjoy the benefits of "EEE" regime, which translates as “zero" tax on contribution, accrual and withdrawal. Many tax experts said that there was a need to realign NPS to a more tax-friendly mode.