Discover the tax implications of pension from the National Pension System (NPS) in India. Find out if the pension received is taxable and what are the tax exemptions available for NPS pensioners.
The National Pension System (NPS) is a retirement savings scheme introduced by the Government of India in 2004. It has become an increasingly popular choice for individuals looking to secure their financial future post-retirement. However, one of the common queries regarding NPS is whether the pension received is taxable or not. In this blog, we will take a look at the tax implications of the pension received from NPS.
First and foremost, it is important to understand that NPS has two components – Tier I and Tier II accounts. The Tier I account is a mandatory account for government employees and individuals opting for the scheme voluntarily, whereas the Tier II account is an optional account for individuals who already have a Tier I account.
The contribution made to the Tier I account is eligible for tax benefits under Section 80C of the Income Tax Act, 1961, up to a limit of 1.5 lakhs per annum. The interest earned and the maturity amount received on the Tier I account is exempt from tax.
When it comes to the pension received from the NPS, it is partially taxable. The portion of the pension received that represents the contribution made by the individual is tax-free, while the portion that represents the interest earned on the contribution is taxable.
To understand this better, let us take an example. If an individual has made a total contribution of ₹10 lakhs to the NPS over a period of time, and the interest earned on this contribution is ₹ 20 lakhs, then the individual will receive a pension of ₹ 30 lakhs. In this case, the portion of the pension that represents the contribution made by the individual (i.e. ₹ 10 lakhs) is tax-free, while the portion that represents the interest earned (i.e. ₹ 20 lakhs) is taxable.
If you utilize 40% of your NPS corpus for lump sum withdrawal and the remaining 60% for annuity purchase during retirement, you won’t have to pay any taxes at that time. Only the annuity income you receive in the following years will be subject to income tax.
The tax treatment of the pension received from NPS can be summarised as follows:
- The contribution made to the NPS is eligible for tax benefits under Section 80C of the Income Tax Act, 1961, up to a limit of 1.5 lakhs per annum.
- The interest earned and the maturity amount received on the Tier I account is exempt from tax.
- The portion of the pension received that represents the contribution made by the individual is tax-free, while the portion that represents the interest earned on the contribution is taxable.
- If an individual opts for the lump sum withdrawal option, then the entire amount received will be taxable.
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Available Tax Exemptions for NPS Pensioners
- Tax Exemption on Partial Withdrawal: Individuals can make partial withdrawals from their NPS account for specific purposes such as higher education, buying a house, etc. These withdrawals are exempt from tax up to a certain limit. The limit for tax exemption on partial withdrawals is ₹ 50,000, or 20% of the corpus, whichever is lower.
- Tax Exemption on Annuity Purchase: Individuals can purchase an annuity from a Life Insurance Company with a part of the corpus to receive a regular pension. The purchase of annuity is exempt from tax up to a certain limit. The limit for tax exemption on annuity purchase is 40% of the corpus, which is used to purchase the annuity.
- Tax Exemption on Death: In the event of the death of an NPS subscriber, the entire corpus is exempt from tax if it is paid to the nominee or legal heir.
- Tax Exemption on Maturity: At maturity, an individual can withdraw up to 60% of the corpus, which is exempt from tax. The remaining 40% of the corpus must be used to purchase an annuity.
NPS provides several tax exemptions to its subscribers, which makes it an attractive investment option for individuals looking to save for their retirement. The tax exemptions available for NPS pensioners include tax exemption on partial withdrawals, annuity purchase, death, and maturity. However, it is important to note that the rules and regulations surrounding NPS tax exemptions are subject to change, and it is advisable to consult with a financial advisor for the latest information.
In conclusion, the pension received from NPS is partially taxable, and the tax treatment depends on the individual’s choice of withdrawal option. It is important to consult a financial advisor or a tax expert before making any decision regarding NPS. By understanding the tax implications of NPS, individuals can make an informed decision and plan their retirement savings accordingly.
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