This is the headline of one of the popular newspapers. What’s wrong with it? Not just one, there are other media outlets, which have something similar to say.
Government makes NPS withdrawal 100% tax free.
Entire NPS withdrawal at retirement is tax free now.
Again, what’s wrong with the above?
Simple, none of these is true. Here’s why.
So far, taxation of maturity proceeds on NPS or National Pension Scheme worked as below:
- Withdraw 40% lump sum tax free
- Withdraw another 20% lump sum by paying tax at marginal tax rate
- Convert compulsorily 40% of the maturity amount into an annuity
Of course, you have the choice to convert the entire maturity proceeds into an annuity too.
What’s the hullabaloo about?
In the recent round of changes, taxation for point no. 2 has been modified. An NPS investor will be allowed to withdraw this 20% lump sum too, tax free.
So, in total, 60% (40% earlier + another 20%) will remain tax free if you withdraw it as lump sum on maturity.
The remaining 40% still converts into an annuity, which you receive over the number of years you choose.
See the table below to understand what has changed.
Here’s the big fact.
Annuity income is NOT tax free. It is taxable. You have to add it to your annual income, show it in your tax returns and pay tax as per your marginal tax slab.
If you are in the 30% tax slab post retirement, you pay 30% tax on annuity. As simple as that. And yet, most people are choosing to ignore this tax implication.
On the part of the sellers, they are behaving irresponsibly and telling you that NPS withdrawal is 100% tax free.
Oh yes, that is possible only in one scenario. If you are in the 0% tax bracket during the years you receive annuity, you pay no tax.
How likely is that for you? Very unlikely.
Most investors who are thinking about investing the additional Rs. 50,000 in NPS will likely fall in the 20% to 30% tax slab, even after maturity.
So, stop believing this 100% tax free NPS nonsense.
Yes, the additional 20% tax free amount on maturity does make it more sweet but it doesn’t take away all the other downsides.
By the way, are you still investing only for tax savings?
The post NPS (National Pension Scheme): NPS withdrawal made 100% tax free appeared first on Unovest.
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