7th Pay Commission recommendations for exempting NPS from Income Tax – But Govt chose to make other Provident Fund Schemes at par with NPS by levying Income Tax on Provident Fund withdrawals
When an employee who is covered by NPS retires, 40% of the matured fund in NPS has to be utilized by him / her to buy an annuity for getting regular pension under NPS. Even though this 40% of NPS fund is not taxable, monthly pension that the employee is going to get is liable to income tax just like any other income.
In respect of remaining 60% of matured fund from NPS, Income Tax has to be paid at tax bracket 10%, 20% or 30% in which the income tax liability of the employee concerned falls in to. However, till 31.03.2016, the taxability of other provident funds such as EPF, PPF, GPF etc are coming under EEE (Exempt, Exempt, Exempt) Category. In other words, amount withdrawn from these funds are not liable to income tax.
In this background, 7th Pay Commission in its report released in November 2015, has recommended with regard to NPS (National Pension System) for exempting NPS withdrawal and NPS annuity from Income tax and service tax respectively.
The detailed recommendations of 7th Pay Commission (in Page 427) with regard to Taxability of NPS are as follows.
“The Commission feels that tax neutrality should be ensured across various avenues for long term savings for post retirement incomes so that the employees covered by NPS are not at a disadvantage. The Commission therefore recommends that withdrawals under the NPS should be tax-exempt to place NPS at par with other pension schemes. The Commission also recommends that the service tax levied at the time of annuity purchase
by NPS subscribers should be exempted.”
While recommendations of 7th Pay Commission is under process of consideration of Govt, Budget 2016 has come up with a unhappy news for all Salaried Employees including Government Employees. Budget 2016-17, has proposed to collect income tax on 60% of amount withdrawn by Employees from all Provident Fund Schemes. The remaining 40% of amount withdrawn of Provident Fund Schemes are exempted from Income Tax. Also, the amount to the extent of annuity purchased out of 60% of amount withdrawn from Provident Funds are exempted from Income Tax.
In the case of NPS (National Pension System), till 31.03.2016, the entire amount withdrawn from NPS at the time of maturity which was not utilized for buying annuity is subjected to Income Tax. Now, Govt has given a partial relief to NPS subscribers by exempting 40% of amount withdrawn from Income Tax.
In other words, after buying annuity for 40% of matured amount under NPS, in respect of 60% of matured fund from NPS which can be withdrawn by a NPS subscriber, 40% the same is exempted from Income Tax.