Budget 2017
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Early Withdrawal From NPS Made Tax-Exempt: 10 Things To Know

National Pension Scheme has been given a boost in the Budget with Finance Minister Arun Jaitley offering income tax sops on early withdrawal.
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Subscribers will be eligible for early, partial withdrawal from NPS after 10 years.
Subscribers will be eligible for early, partial withdrawal from NPS after 10 years.

NPS or National Pension Scheme has been given a boost in the Budget with Finance Minister Arun Jaitley offering income tax sops on early withdrawal. He said that early withdrawals to the extent of 25 per cent of the contributions from NPS will not attract income tax. This will come into effect from April 1, 2017. Mr Jaitley also proposed another change in NPS: parity on tax benefits enjoyed by salaried NPS subscribers and self-employed individuals. NPS is a defined contribution retirement account and helps an individual create a retirement corpus. 

Here are 10 things to know: 

1) According to the current tax laws, withdrawals from the NPS are tax-exempt if subscribers withdraw up to 40 per cent of the corpus when they reach 60 years of age. 



2) Overall, an NPS subscriber can withdraw up to 60 per cent of the maturity corpus at the age of 60 and the remaining amount has to be converted into annuity. 

3) If the subscriber exits NPS before 60 years, then only up to 20 per cent of the corpus can be withdrawn and the rest has to be converted into annuity. An annuity is a financial product that gives you periodic income or pension. 

4) Under the current NPS rules, subscribers after 10 years become eligible for early, partial withdrawal under specific circumstance like children's higher education or marriage, construction or purchase of house and treatment of critical illness (for self, spouse, children or dependant parents). 

5) Early withdrawal is allowed up to 25 per cent of one's contribution. In addition, the subscriber is allowed to withdraw a maximum of three times during the entire tenure of subscription under NPS and not less than a period of five years shall have elapsed from the last date of each of such withdrawal. 

6) Financial experts have welcomed the government's move to give income tax exemption on early withdrawal. "With the introduction of the 40 per cent tax exemption on final withdrawal and 25 per cent tax-exempted partial withdrawal in special circumstances, NPS has become a part tax-deferral and part tax-saving product," says Manoj Nagpal, CEO of Outlook Asia Capital. 

7) In Budget 2016, the finance minister had announced an exclusive deduction of Rs 50,000 for under Section 80CCD. 

8) According to the current tax laws, NPS is subjected to Exempt Exempt Tax (EET) tax structure. In other words, this means that contributions to NPS, the growth in corpus is not taxed but the lump sum withdrawn is partially taxed. In contrast, other retirement savings schemes like PPF and EPF enjoy Exempt Exempt Exempt (EEE) status, where maturity amount is also not taxed. 

9) Mr Nagpal says "EET Vs EEE in terms of taxation is not a key factor that should influence the decision of an individual. Though this may sound intuitively incorrect, but EET or EEE will not make a huge difference. In the current format if NPS can generate a 0.25 per cent incremental returns, over a period of 30 years it will nullify the EET vs EEE differential." 

10) According to data from Value Research, the average 5-year return from NPS funds (tier 1) investing in government bonds has been around 11 per cent annually while in corporate debt at around 11.50 per cent. Through NPS an individual can also take equity exposure up to 75 per cent of his/her investment.



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