Download Automated Income Tax Preparation Excel Based Software All in One for Assam State Govt Employees for the F.Y.2017-18 & A.Y.2018-19 [ This Excel Utility can prepare at a time Tax Compute Sheet + Individual Salary Structure as per Assam State Employees Salary Pattern + Automated H.R.A. Exemption Calculation + Automated Form 16 Part A&B and Form 16 Part B as per the latest Income Tax Slab for the Financial Year 2017-18 & Assessment Year 2018-19]
We know that everybody discusses NPS tax benefits during investment. But hardly few know about the taxation part when you start to withdraw. If you know the taxation issue while your retirement, then surely you stay away from NPS investment.
Hence, in this post, I will try to explain the tax benefits during investing and also at the time of retirement.
NPS Tax Benefits while investing
First, let us understand the NPS tax benefits while investing. I tried to explain the same from below image. Remember that all tax benefits while investing are only for Tier 1 NPS account (Refer the post related to the difference between Tier 1 and Tier 2 of NPS at “Difference between Tier 1 and Tier 2 Account in NPS“. There is no tax benefit for the investment you do in Tier 2 NPS account.
Let us discuss one by one as below.
NPS Tax Benefits under Sec.80CCD (1)
- The maximum benefit available is Rs.1.5 lakh (including Sec.80C limit).
- An individual’s maximum 20% of annual income (Earlier it was 10% but after Budget 2017, it increased to 20%) or an employee's (10% of Basic +DA) contribution will be eligible for deduction.
- As I said above, this section will form the part of Sec.80C limit.
NPS Tax Benefits under Sec.80CCD (2)
- There is a misconception among many that there is no upper limit for this section. However, the limit is least of 3 conditions. 1) Amount contributed by an employer, 2) 10% of Basic +DA and 3) Gross Total Income.
- This is additional deduction which will not form the part of Sec.80C limit.
- The deduction under this section will not be eligible for self-employed.
NPS Tax Benefits under Sec.80CCD (1B)
- This is the additional tax benefit of up to Rs.50,000 eligible for income tax deduction and was introduced in the Budget 2015
- Introduced in Budget 2015. One can avail the benefit of this Sect.80CCD (1B) from FY 2015-16.
- Both self-employed and employees are eligible for availing this deduction.
- This is over and above Sec.80CCD (1).
How much maximum NPS Tax Benefits available while investing?
For Self-Employed
The maximum benefit you can avail under Sec.80CCD (1) is Rs.1,50,000 (including Sec.80C limit). Along with this Rs.50,000 under Sec.80CCD (1B). So total maximum benefit an individual can avail is Rs.2 lakh (where Rs.1.5 lakh will be part of Sec.80C limit).
Even though on paper it looks like maximum benefit available will be Rs.2 lakh. But under Sec.80C, you will have a lot of choices and few default options to save (like life insurance premium or PPF). Hence, never be in wrong belief that NPS will ALONE give you Rs.2 lakh tax benefit.
For salaried benefits.
You can avail the tax benefit under Sec.80CCD (1)+Sec.80CCD (1B) up to Rs.2 lakh. Along with that, you have another additional option to claim deduction under Sec.80CCD (2), which is unlimited and based on certain conditions. I explained the same in my above post.
NPS taxation while withdrawing or maturity
NPS Taxation on retirement
Let us say you accumulated Rs.100 at retirement. In that, you are eligible to withdraw Rs.60 or 60% of such accumulated corpus. Remaining Rs.40 or 40% need to be purchased an annuity product.
In the lump sum withdrawal of Rs.60 or 60%, Rs.40 or 40% is tax-free. Remaining Rs.20 or 20% is taxable income in the year of withdrawal.
The income from an annuity will be taxed year on year as per your tax slab. So you are deferring the tax treatment for future years from the 40% annuity you will buy.
Note-As per Budget 2017, the subscriber whose NPS account is at least 10 years old will be eligible for withdrawing 25% of his/her contributions (without accrued income earned thereon). This 25% withdrawal will be part of total 40% withdrawal (which is tax-free).
NPS Taxation on Pre-mature withdrawal
In this case, you are allowed to buy an annuity product from the 80% of accumulated corpus. So there is no confusion here as the annuity will be taxable income for you year on year.
The confusion is about 20% lump sum withdrawal. IT Department needs to come out with clarity. The rules just say 40% of lump sum withdrawal from NPS is tax-free. However, in this particular case, the lump sum investment is 20%.
Hence, whether the whole 20% is tax-free (as it is less than 40% tax-free limit) or 40% of 20% is only tax-free (i.e. 8% from 20%). As of now, there is no clarity on this aspect.
NPS Taxation on Partial withdrawal
Partial withdrawal from NPS is allowed on certain conditions. I explained the same in my post “National Pension System (NPS)-New Partial Withdrawal and Exit Rules“.
There is no clarity about the tax treatment relating to this partial withdrawal. However, I feel such partial withdrawal will be taxed in the year of withdrawal as per subscriber’s income tax slab.
NPS Taxation in the event of death of subscriber
For Government, Employees-Nominee will be allowed to withdraw only 20% lump sum. The nominee must purchase the annuity from remaining 80%. However, in case the accumulated corpus is less than or equal to Rs.2,00,000 then his spouse (or nominee) can withdraw all the amount at once without any mandatory.
For others-Nominee will be allowed to withdraw 100% accumulated corpus. However, the nominee has a choice to buy an annuity too.
The lump sum withdrawal by the nominee will be exempt from Income Tax. If the nominee opted for buying an annuity, then annuity income will be taxed as per nominee’s income tax slab in the year of receipt.