In order to build a corpus for retirement, people invest in Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Pension System (NPS) and annuity products of life insurance companies. One of the main objectives of a pension plan is to have a regular flow of income which is tax-efficient. One must plan the withdrawals from these schemes to ensure that the corpus grows and there is minimum tax outgo.
Investing in retirement products such as PPF, EPF, NPS and products of life insurance entails tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. The employer’s contribution is exempt from tax up to 12% of salary in case of EPF and 10% of salary in case of NPS. The tax exemption is capped at Rs 7.5 lakh per annum. Deduction for employees’ contribution is available up to Rs 1.5 lakh under Section 80C. Additional deduction of up to Rs 50,000 is available on employees’ contribution to NPS under Section 80CCD. In EPF, interest on employees’ contribution above Rs 2.5 lakh (Rs 5 lakh for government employees) is taxable annually under the head ‘income from other sources’.
Tax norms on withdrawals
For EPF, withdrawal (both partial or final) after five years of continuous service is exempt from tax. If you withdraw from EPF before five years of continuous service, tax at source at 10% will be deducted. If the Permanent Account Number has not been provided, it will be deducted at the highest slab rate. “In case of EPF, if withdrawal is before five years, then the employer’s contribution that was exempt from tax earlier becomes taxable on withdrawal,” says Neeraj Agarwala, partner, Nangia Andersen India.
For NPS at maturity, 60% of the lumpsum amount received by subscribers is tax-free. Monthly income from the remaining 40% invested for purchasing annuity is taxed as per marginal rate.
Even partial withdrawal from NPS — from a Tier 1 account after 10 years of membership for an amount not exceeding 25% of his contributions, excluding the employer’s contributions — is exempt from tax. Only three partial withdrawals are allowed and that too with a gap of five years between each withdrawal.