NPS: How do contributions to and withdrawal from National Pension System are taxed?

Question: Kindly guide us on the tax benefits associated with making contributions and withdrawal to/from the National Pension System.

Answer given by Dr. Suresh Surana, Founder, RSM India: The National Pension System (NPS) is a tax-saving investment-cum-pension scheme of their residential status belonging to the age group of 18 years to 70 years. Pension Funds are responsible for investing contributions, accumulating them and managing pension corpus through various schemes under the National Pension System.

Tax benefits associated with contributing to NPS are as follows:

Section 80CCD(1) of the Income Tax Act allows individuals to claim deduction against their NPS contribution and the same shall be lower of the following:

(i) Taxpayer’s contribution to the NPS

(ii) 10% of the Salary (applicable in case of employment) or 20% of the Gross Total Income (applicable in case of a self employed taxpayer)

For the purpose of computing such deduction threshold, ‘Salary’ would include Basic Salary plus Dearness allowance, if the terms of employment are so provide, but excludes all other allowances and perquisites.

Also, the aggregate deduction under section 80C, 80CCC and 80CCD (1) of the I-T Act would be subject to the threshold limit of Rs. 1,50,000.

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Additional Tax Benefits u/s 80CCD(1B) of the Income Tax Act, 1961

An additional deduction of Rs 50,000 would be available u/s 80CCD (1B) of the I-T Act in respect of any contribution on which the overall threshold limit of Rs 1,50,000 is not applicable.

It is pertinent to note that when claiming deduction under this section, one should ensure that there is no duplication of claim.

Tax Benefits on Employer’s Contribution to National Pension Scheme u/s 80CCD(2)

An employee can claim a deduction of upto 10% of the salary (14% of the salary in case of Central or State government employee) w.r.t. the employer’s contribution to NPS.

The Tax Benefits associated with withdrawal from NPS are as follows:

Tax benefits on Partial Withdrawal from NPS account

Taxpayer would be eligible for tax exemption on the amount withdrawn upto 25% of the self contribution, on such terms and conditions as may be specified by PFRDA u/s 10(12B).

Tax benefits on Lumpsum withdrawal

Taxpayer would be eligible for tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60 or superannuation under section 10(12A).

Disclaimer: The views and facts shared above are those of the expert. They do not reflect the views of financialexpress.com