The Provident Fund Schemes like EPF (Employees Provident Fund) and PPF (Public Provident Fund) are very popular long-term savings products in India. EPFO has annual accruals of over Rs 1.2 trillion and has total assets under management worth Rs 11 trillion. The total outstanding deposits under PPF scheme during 2016-17 were around Rs 4,689 billion.

The numbers tells us that EPF / PPF are undoubtedly very popular investment avenues among Indian investors. EPF scheme is applicable for the salaried class only, whereas, PPF is available to all resident Indian citizens.

Besides EPF and PPF, another popular retirement oriented scheme which is gaining popularity among the salaried/self-employed is NPS Scheme. The asset under management (AUM) under NPS stood at around Rs 2 lakh crore in 2017.

I am very sure that you might have invested at least in any one of the above Schemes voluntarily or involuntarily (ex : NPS is mandatory for Central Govt employees).

Most of us are clear about the tax benefits offered by EPF, PPF or NPS Schemes. But, are you clear about the tax treatment of partial or full withdrawals from EPF, PPF or NPS?

In this post, let’s discuss – How are Partial or full withdrawals from EPF, PPF or NPS taxed? How are maturity proceeds from PPF or NPS taxed? What are the latest taxation rules regarding NPS withdrawals? Are withdrawals from NPS Tier 2 account taxable? How is income tax calculated on NPS tier II withdrawals?

Tax Treatment of EPF, PPF or NPS Withdrawals (Partial / Full)

NPS Withdrawals Latest Tax rules EPF PPF Partial full withdrawals taxation rules NPS Early exit Premature withdrawals NPS Tier 2

Taxation of withdrawals (full/partial) & Maturity proceeds under PPF Scheme

  • Public Provident fund falls under Exempt-Exempt-Exempt tax treatment category. You get tax deduction at the time of investment, the income earned on the capital is tax-free and the maturity proceeds are also tax free.
  • The money withdrawn partly or fully before completion of its original tenure of 15 years are fully exempt in your hand.
  • In case, you take a loan from the PPF account, the interest paid on such loan can be claimed against your business income if the funds are used for your business.

Partial or Full withdrawals from EPF Scheme & Tax implications

  • The EPF Scheme also falls under E-E-E Tax category.
    • (In case, you are contributing to a Recognized PF maintained by a Private Trust of your Company (Exempted Organisation), any interest exceeding 9.5% shall be added to your (employee’s) Salary Income and is subject to income tax.)
  • Full EPF Withdrawal :
    • If you withdraw your EPF balance before completing 5 years of continuous service, it is considered as a taxable income.
      • However, members whose service has been terminated due to ill health, contraction or discontinuance of business of employer or other cause beyond the control of the member, no income tax shall be applicable.
    • If you withdraw the EPF balance after completing 5 yrs of service, then EPF balance is not taxable. So, in this case, it falls under E-E-E tax category.
    • If you resign/retire/get terminated from your job, but do not withdraw your EPF immediately then interest income earned on your EPF balance is taxable during this non-contributory period. The interest income earned during your employment remains tax-exempted though.
  • Partial EPF Withdrawals :
  • Income tax is not applicable on transfer of funds from one EPF account to another EPF account, on consolidation of multiple EPF accounts into one EPF account or on transfer of EPF funds to NPS Scheme.

Withdrawals from GPF/SPF

  • The money withdrawn partly or fully from Govt. Provident Fund or Statutory PF scheme is tax exempt. ( These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc.,)

NPS withdrawals & Taxation rules

National Pension System (NPS) offers two types of accounts – Tier I and Tier II.

  • NPS Tier-1 Scheme & Maturity proceeds on Retirement
    • Money withdrawn from NPS account at the time of retirement (or) reaching the age of 60 years is exempt only up to 40% of the accumulate balance.
      • After attaining 60 years of age, you are allowed to withdraw 60% of the total Corpus amount and at least 40% of the accumulated wealth in the NPS account needs to be utilized for purchase of annuity/pension plan.
      • 60% of total balance is a taxable income and 40% of balance which is used to buy an annuity scheme (for pension) is tax-exempt. (Kindly note that annuity income is a taxable income.)
    • In case the total corpus in the account is less than Rs. 2 Lakhs as on the Date of Retirement (Government sector)/attaining the age of 60 (Non-Government sector), the subscriber (other than Swavalamban subscribers) can avail the option of complete withdrawal. However 60% of this withdrawal will be taxable.
  • NPS Withdrawal by Nominee in the event of the death of the subscriber
    • The lump sum withdrawal made by the nominee is exempt from Income Tax.
    • In the event of the death of the subscriber, the nominee can withdraw the entire accumulated corpus (in case of All Citizen model). The nominee has the option to invest entire corpus in an annuity product as well.
    • In the case of government sector NPS, purchase of annuity (at least 80%) is mandatory and remaining can be taken as lump sum withdrawal.
  • NPS Tier-1 Account & Partial withdrawals
    • The Tier 1 account is non-withdrawable till the person reaches the age of 60. However, partial withdrawal before that is allowed in specific cases.
      • In the latest rule change (Budget 2017), PFRDA (Pension Fund Regulatory And Development Authority) has relaxed the withdrawal norms to the effect that now the subscribers can withdraw up to 25% of contributions starting from the third year of opening of NPS.
      • Kindly note that such partial withdrawals are tax-exempt. (The NPS partial withdrawals made before 1.04.2017 are taxable.)
  • NPS Tier-1 Account withdrawal (NPS early exit – irrespective of cause)
    • If you want to withdraw from NPS before the age of 60 or before retirement (other than the purpose specified for partial withdrawal), the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS. The balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for monthly pension of the subscriber.
    • However the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.
  • Taxation of NPS Tier-2 withdrawals
    • The Tier II National Pension Scheme account is just like a savings account and subscribers are free to withdraw the money as and whenever they require.
    • There is no clarity on how these withdrawals are treated for taxation.
      • You can withdraw your money just like in bank fixed deposits or FDs. But there is a catch. Unlike the FD, where only the interest is taxed, here the entire amount withdrawn can be taxable as per individual’s tax slab rate. (Ideally, only the realized gains and not the entire amount should be taxable. But, tax rule is unknown. We need clarification from the CBDT on this.)
      • Some experts believe that only the realized gains on such withdrawals can be treated as capital gains from mutual funds and can be taxable accordingly.
        • Redemption from Equity scheme (E) of NPS Tier II shall get tax treatment of an equity fund.
        • Redemption from Government Bond (G) or Corporate Bond scheme (C) shall be taxed like redemption from debt mutual fund.
    • As of now, there is no indexation benefit on NPS tier-2 deposits and the withdrawals are taxable. Hence, it is prudent to completely avoid investing in NPS Tier-2 account.

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(Post first published on : 21-November-2018)

EPF, PPF or NPS Withdrawals (Partial / Full)


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