Tuesday, August 28, 2012

National Pension Scheme and Taxation at Maturity

One of our blog readers had posted a query in the article titled "Is National Pension Scheme (NPS) A Worthwhile Investment Option?" about the Taxation aspects of the NPS Scheme. So, here we are. The purpose of this article is to outline the Taxation aspects of the National Pension Scheme when you Retire...

Before we begin - We all know that the investment you make against NPS is exempt from Income Tax as per the existing tax slabs. So, I dont think there is a need to cover that here.

Tax treatment of NPS when you reach the retirement age:

The contributions made by you and your employer get accumulated in your Tier I account and the value of such corpus depends on factors like quantum of money deposited every year, the asset classes (The fund type) opted by you for investment and the returns generated by your pension fund manager. Once you complete the 60 years of age, you have to compulsorily purchase an annuity for an amount equal to minimum of 40% of the accumulated balance in your NPS account.

The annuity needs to be bought from a life insurance company which is registered with IRDA (Insurance Regulation and Development Authority). In case you wish to withdraw the money before you complete 60 years of age, you can do so but in that case you will have to purchase an annuity utilizing minimum of 80% of the accumulated corpus at the time of withdrawal.

If you are already 60, you can withdraw the entire amount but as mentioned before, you need to purchase an Annuity for at least 40% of the corpus. This amount you use to purchase an Annuity is not taxed right away but, the pension you receive will be taxed. The remaining money (that is left after purchasing the Annuity) is taxable.

Please note that it is not mandatory for you to withdraw the whole corpus left after purchase of mandatory annuity. You can opt to withdraw the balance amount in a phased manner. However you need to withdraw a minimum of 10% of your accumulated corpus every year. This account has to be closed once you reach the age of 70 years. This money received by you, either lump sum or in a phased manner is fully exempt as per the provisions proposed in DTC.

In case of untimely death of the NPS account holder before completion of 60 years of age, the nominee can withdraw the corpus accumulated at the time of death of the account holder. The money received by the nominee or legal heirs is fully exempt from Taxes.

The annuity which you receive is taxable on yearly basis. This annuity you receive will be considered your income and hence is taxable as per the Indian tax laws. But, as per the current tax slabs, any income of up to 2.5 Lakhs is fully tax free. For more details on the current Tax Slabs - Click Here

As a continuation to the article titled "Is National Pension Scheme (NPS) A Worthwhile Investment Option?" I want to reiterate the fact that NPS offers you an excellent tool to save your tax and plan for your future as well. It is very tax efficient because you get the tax benefits for the whole amount of your contribution and need to use only 40% of the accumulated wealth for purchase of annuity. It is pertinent to note that though the annuity is taxable in your hand at the time or receipt, the applicable rate of tax would in all probability be very low as compared to the rate of tax which you are paying now.

So, go ahead, plan for your retirement and retire RICH!!!


  1. Dear Mr. Anand

    can you update on the taxability of withdrawals or maturity proceeds from the Tier-2 account.

    Thanks in advance.

    1. Hi, per my understanding the Tier II Acc is tax neutral meaning - it doesnt give you any tax benefits and nor does it tax you for withdrawals.

  2. Suppose if I have made contributions of say 10000 INR over 10 eyars in the Tier-11 account and the corpus has grown upto 15000 INR. Will this gain of 5000 INR will be taxable as per the interest income ????

    1. It depends on when you withdraw, how old you are at the time and how much you want to withdraw.

  3. Dear Anand,

    In the above example, suppose I withdraw 15000, then should I treat teh entire 15000 as income or only the interest accumulated as income?

    1. If you are talking about @ retirement, if this is the amount you withdraw after purchasing the annuity then I believe the full amount is taxable

  4. Hi Anand: Great stuff and can say you tried summarizing the thing well mannered & I read various other your post as well.

    Well; can you please emphasized or through some light in case it's in the scope that a early age guy[Age 28 ] should go with NPS or Mutual fund would be great option . or else he should pick some ULIP like HDFC click to retire ( I know this one is not your advice in terms of various fact )

    Appricialte your efforts.


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