Early withdrawal from NPS will be tax-free

MUMBAI: Early withdrawals from the National Pension System ( NPS) will not attract tax, the Budget has clarified, and experts suggest using this route to increase the tax-free component of your retirement corpus.

An NPS subscriber can withdraw 25% of his contribution to the corpus for emergencies before retirement. For instance, let us assume that your corpus now is Rs 2 lakh -- Rs 1 lakh contributed by you and the remaining by your employer. Instead of withdrawing the entire amount at retirement, you can withdraw Rs 25,000, or 25% of your contribution, earlier, without any tax incidence. The remaining Rs 1.75 lakh is withdrawn on retirement.

Since 40% of this Rs 1.75 lakh or Rs 70,000 is tax-free at retirement, the total tax-free amount goes up to Rs 95,000 (Rs 25,000 + Rs 70,000). Had the entire amount been withdrawn at retirement, the tax-free component would have been Rs 80,000.

Moreover, till now salaried NPS subscribers enjoyed an extra advantage. While they can contribute up to 10% of their income to NPS as own contribution and another 10% as employer’s contribution, the selfemployed were allowed to contribute only 10% of their income.

Now, self-employed individuals are eligible for deduction up to 20% of gross total income for contribution made to NPS. “It is good that the anomaly regarding the NPS exemption has been rectified in the Budget,” said Manoj Nagpal, CEO, Outlook Asia Capital.