Disparity on NPS tax exemption: Partial withdrawals benefit only employees

The ICAI suggests changing and extending the tax exemption benefits on partial withdrawals to all subscribers.

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From the total amount of the NPS account, only partial withdrawals of up to 25 per cent are exempt from tax. But currently, this facility is not available to non-employee NPS subscribers.

The Finance Act 2018 extended the tax exemption benefits on partial withdrawals to all subscribers, according to the Institute of Chartered Accountants of India (ICAI). However, a necessary amendment to the Income Tax Act is yet to be made to provide tax exemption in the case of partial withdrawal by non-employee subscribers. Hence, for now, the benefit will be enjoyed only by employees who are contributing to the NPS. The non-employee subscribers of NPS have yet to avail of this benefit.

In its Pre-Budget Memorandum 2023, ICAI said, “It is suggested that the amendment as made in Section 10(12A) may also be made in Section 10(12B), thereby extending the benefit of exemption in case of partial withdrawal to non-employee subscribers as well. The said amendment would also be in line with the intention of the legislature to provide a level playing field to both types of subscribers to the NPS.”

An exemption of up to 60 per cent of the total amount is payable to an employee contributing to the NPS on the closure of his account or on his opting out of the scheme as per the provisions of ICAI Section 10(12A). While in the case of partial withdrawal from NPS, an exemption of up to 25 per cent of contributions made by employees is provided by Section 10(12A). These exemptions were not available to non-employees assessed as contributing to the NPS before 2018. 

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