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Centre introduces provision of taxation on NPS in Income Tax Act
April, 12th 2017

The provision that the withdrawal from the National Pension Scheme is taxed to the extent of 60 per cent has been introduced into the Income Tax Act, 1961 (‘Act’) vide Finance Act, 2016 by inserting clause (12A) in Section 10 of the Act.

The provision that the withdrawal from the National Pension Scheme is taxed to the extent of 60 per cent has been introduced into the Income Tax Act, 1961 (‘Act’) vide Finance Act, 2016 by inserting clause (12A) in Section 10 of the Act.

Prior to the Finance Act, 2016, the National Pension Scheme (NPS), referred to in section 80CCD was under Exempt, Exempt and Tax (EET) regime, i.e., the monthly/periodic contributions during the pension accumulation phase were allowed as deduction from income for tax purposes.

The returns generated on these contributions during the accumulation phase were also exempt from tax but the terminal benefits on exit or superannuation, in the form of lump sum withdrawals, were taxable in the hands of the individual subscribed or his nominee in the year of receipt of such amounts unlike PPF and EPF which have been enjoying the EEE regime, i.e. Exempt, Exempt, Exempt.

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In order to rationalize the taxability of receipts from pension plans, vide Finance Act, 2016, section 10 of the Act was amended to provide that any payment from the National Pension Scheme to an employee on account of closure or his opting out of the NPS shall also be exempt from tax, to the extent it does not exceed 40 percent of the total amount payable to him at the time of closure or his opting out of the scheme.

Further, Finance Act, 2017 has amended section 10 of the Income-tax Act to exempt partial withdrawals by employees (to the extent of 25% of the employee’s contribution) from their NPS accounts in accordance with the guidelines prescribed under Pension Fund Regulatory and Development Authority Act, 2013.

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