The National Pension System (NPS) subscribers were allowed to withdraw 60% of their corpus as lump-sum after retirement which was tax-free. However, they can now withdraw up to 60% of their pension corpus periodically once they turn 60. With the recently introduced systematic lump sum withdrawal (SLW) facility, NPS subscribers can choose how they want to receive the amount post-retirement — monthly, quarterly, half-yearly, or annually. If you are planning to opt for a systematic lump-sum withdrawal of your NPS corpus at the time of retirement, you must know how it works and will be taxed. Read on to find outNPS systematic lump-sum withdrawal: Where will your money be invested?
After the latest changes, NPS investors will now have the option to withdraw 60% of their retirement corpus either as a lump sum at once or they can get paid in a phased manner through the systematic lump-sum withdrawal facility post-retirement. Once they turn 60 and choose SLW, the subscribers cannot invest in the pension corpus but their money remains invested in the funds and earns returns
NPS subscribers will get the option to keep their money invested in existing schemes or change their Pension Fund Manager while opting for a systematic lump-sum withdrawal facility. The returns from the plan will be based on the plan they select. “For instance, in the active plan, subscribers can actively decide how their contributions are invested, with a maximum allocation of 50% to equity. Therefore, returns depend significantly on market performance and the chosen equity percentage. On the other hand, in the Auto choice, preferred for less savvy retail investors, investments are made in a life-cycle fund, with the asset allocation determined by a predefined portfolio based on the subscriber’s age. Within ‘Auto Choice,’ there are three options – Aggressive, Moderate, and Conservative – catering to different risk appetites. For the Aggressive Auto Choice plan, the maximum equity allowed is 15% after the age of 55. The return expectations in this scenario are influenced by the chosen risk profile and the predetermined asset allocation. Of course, the expectations of returns are higher in the longer term for portfolios with a heavier allocation to equities followed by corporate bonds,” Nirav R Karkera, Head – Research, Fisdom explains.
Income tax on NPS lump sum withdrawal at the time of exit
Till now, NPS subscribers had the option to withdraw the proceeds only as a lump sum after retirement. “Section 10(12A) of the Income-tax Act provides an exemption from tax for the payment made to a subscriber on closure of account or on opting out of the pension scheme, to the extent it does not exceed 60% of the total amount payable at the time of such closure/opting out. Hence, the lump sum withdrawal of up to 60% on exit from NPS is exempt from tax,” says Puneet Gupta, Partner – People Advisory Services, EY India.
NPS investors will now have the option to either withdraw 60% of the retirement corpus as a lump sum or opt for staggered regular payments of the corpus till the age of 75. If you opt for a periodic withdrawal of the lump sum amount, will the amount remain tax-free?
Answering this, Maneesh Bawa, Executive Director, Nangia Andersen India, says, “In a proposal made by Pension Fund Regulatory and Development Authority (PFRDA), the lump sum corpus can now be withdrawn in a phased manner. NPS subscriber/pensioner has the option to withdraw the desired amount systematically at regular periodic intervals. On a plain reading of the Act, it may be interpreted that as long as the withdrawal portion does not exceed 60% of the total payable amount, the staggered method of withdrawal may not affect the taxability of such amount.”
Echoing the same, Ankit Jain, Partner, Ved Jain & Associates says, “The NPS authority, as per current regulations, does not impose tax on the monthly SLW. Since this systematic withdrawal forms part of the lumpsum withdrawal, it will also remain tax-free.”
“The SLW rules allow for this lump sum to be spread over a prorated period, given the above the monthly SLW deposits (principal and interest) into the account holders’ bank accounts will be exempt from taxation similar to a normal lump sum withdrawal.”
When it comes to any income that is earned as a return on this invested amount after going for SLW option, the tax treatment of the income (principal plus interest) from systematic lumpsum withdrawal (SLW) is currently unclear, as authorities have not provided sufficient clarity, says Karkara.
Gupta echoes this view, “There is no clarity in the Income-tax law on this aspect.”
Many experts are expecting further clarity from tax authorities on this issue. “It is awaited that the Central Board of Direct Taxes (CBDT) may analyse the impact of the proposed changes made by PFRDA and issue a notification on the tax treatment of the various components of NPS withdrawal,” says Bawa.
ET Wealth Online sent an e-mail to CBDT to clarify how money withdrawn through NPS systematic lump-sum withdrawal will be taxed. At the time of publishing this story, CBDT had yet not replied to the e-mail.
Thus, we need clarity on the following aspects, Gupta points out:
1) Whether tax exemption will be available in case a subscriber opts for systematic lump sum withdrawal?
2) If yes, what would be the quantum of exemption, especially considering the corpus may continue growing with market-linked returns for up to 15 additional years after closure/opting out?
3) If returns earned after exiting from NPS on closure/opting out are considered taxable, what would be the manner/timing of taxation for the subscriber
NPS withdrawal rule at the age of 60:
| Earlier | Now | |
| Retirement age(years) | 60 | 60 |
| Deferment period (years) | 75 | 75 |
| Lumpsum withdrawal limit | 60% | 60% |
| Withdrawal frequency | Single tranche or an annual basis. The subscriber must initiate and authorise each withdrawal request | Monthly, quarterly, half-yearly and annually through systematic lump sum withdrawal (SLW) facility |
| Taxation for lump sum withdrawal | Tax-free | There is a lack of clarity regarding the returns generated from the corpus that remains invested during the systematic lump-sum withdrawal facility. But we believe that it should be tax-free. |
Income tax rule: NPS annuity at the time of withdrawal
The annuity rule of NPS remains unchanged. At the time of exit, NPS subscribers need to use 40% of their pension corpus to buy annuities from the insurance companies. Now, NPS users can either opt for annuity immediately or defer annuity till the age of 75. In case of deferment, equivalent annuity units/amount will be blocked till the deferment period and subsequently, the equivalent units will be redeemed, and the amount will be transferred to concerned Annuity Service Providers (ASPs) for policy issuance. The value earmarked for annuity depends upon the market performance.
So, NPS subscribers can make annuity tax-free till the age of 75 if they defer receiving compulsory annuity income. Explaining this further, Karkera says, “A strategic approach to making annuity tax-free involves deferring it until the age of 75. This allows the amount to grow within the fund, benefiting from compounding.” What it means that you can defer receiving annuity income from 40% of retirement corpus (which is mandatory) till the age of 75, meanwhile you can receive regular income through SLW facility through 60% of lump sum corpus.
Do keep in mind that the annuity income received from NPS is taxable in the year of payout as per the investor’s income tax slab rate, adds Jain. So, when you start receiving the annuity amount at the age of 75 and thereafter, it will be taxed as per your income.
Choosing the NPS SLW facility at exit? Remember these
While choosing the systematic lump sum withdrawal facility, NPS subscribers need to choose the starting date from when they want to receive the proceeds in a phased manner. “The end date will be derived based on total corpus, amount, frequency, and start date and shown to subscribers. In case, the NPS subscriber keeps the ‘end date’ blank, SLW will be triggered at a predefined frequency till the corpus is available/tier is active or till 75 years of age. After attaining 75 years, units available will be redeemed and the balance will be transferred to the Subscribers bank account,” the PFRDA said.
The introduction of the systematic lump-sum withdrawal can be a great boon for senior citizens at that stage. “This will allow them to stay on invested in NPS for a longer term without facing any tax implications. The systematic withdrawal option will also lead to improved financial stability as lump sum payments if not invested properly can eat away at the principal quickly, says Jain.
“For a consistent income, choose systematic lump-sum withdrawal with any frequency according to your needs, as the withdrawn amount remains tax-free,” says Karkara.
If you opt for the SLW facility and defer the annuity when you turn 60, will the returns from NPS be tax-free? While the taxation of annuity income is clear, we need more clarity on the taxation rules of the NPS systematic lump-sum withdrawal facility.
