Budget 2017: Partial withdrawal from NPS not to be taxed

The upper limit of contribution to NPS by self-employed raised from 10-20% of gross total income

The government has clarified in the Budget that no tax will be levied on partial withdrawal not exceeding 25% of contribution from the National Pension System (NPS). It has also taken steps to bring about parity between employees and self-employed in the matter of deduction enjoyed on contribution to NPS.    

"Earlier, there was no clarity on how withdrawals made during the accumulation phase would be taxed. Now, the government has said there will be no tax on withdrawal of up to 25% of contribution," says Manoj Nagpal, chief executive officer, Outlook Asia Capital.    

Withdrawals from NPS can be done at the time of retirement (60 years). Withdrawal is also permitted during the accumulation phase in some circumstances: illness, child's marriage or education, house construction, etc.  

The point to be noted is that 25% withdrawal is permitted not on corpus but on contribution. Suppose you have invested Rs 5 lakh in NPS so far. That is your contribution to the scheme. Assume that after a few years the Rs 5 lakh grows into Rs 10 lakh. The latter is your total corpus in the scheme. If you wish to withdraw, you will only be allowed to withdraw up to 25% of contribution, in this case, 25% of Rs 5 lakh, or Rs 1.25 lakh.

Another change that has been made is regarding rationalisation of deduction under Section 80CCD. It is proposed to amend this section and allow individuals who are not employees to contribute up to 20% of gross total income, up from 10%.

The 80CCD deduction is part of the Section 80C limit of Rs 1.5 lakh. Two types of people are part of NPS: salaried employees and self-employed. Suppose that a salaried person joins NPS offered by his employer. The employee can contribute up to 10% of his salary, and the employer can also contribute 10%. The employee's contribution enjoys deduction under Section 80C. On the employer's contribution of 10% too the employee enjoys deduction, which is over and above the Section 80C limit. Thus, the employee can enjoy tax deduction on NPS contribution up to 20% of his salary.

For a self-employed person, the limit up to which he could enjoy tax deduction was 10% of his gross total income. Now the limit has been raised to 20%. "Basically, the step is aimed at bringing about parity between employees and the self-employed," says Suresh Surana, founder, RSM Astute Consulting Group.