Why is Post Office deducting TDS on NSS withdrawal when Budget 2025 made it tax-free?

The Union Budget 2025 proposed to provide tax exemption on withdrawals from the National Savings Scheme (NSS) on or after August 29, 2024.

The Central Government announced this proposal around six months after the Department of Economic Affairs (DEA) said no interest would be paid on NSS balances from October 1, 2024.

Although Budget 2025 has provided for tax exemption on withdrawals from the NSS, no corresponding change in TDS rules has been announced. This seems to be affecting some NSS account holders, especially those who don’t file ITR.

Recently, CL Narayana from Secunderabad wrote to us saying, “In the recent Budget, it is said that there is no tax liability on money withdrawn from the NSS account. However, when I applied for closure of my account in Secunderabad PO, they said that they would cut TDS, and I have to claim TDS from the Income Tax Department. Please clarify why at all they should cut TDS when the closure proceeds are tax-free.”

To get the TDS amount back, a taxpayer needs to file an ITR. But Narayana is not a taxpayer, and he doesn’t file ITR. Is there a way out for him?

Yes, according to CA Dr Surana.

As per the Budget 2025 proposal, the Central government has exempted withdrawals from NSS accounts from income tax. However, this applies only to withdrawals made on or after August 29, 2024, by an individual.

However, no corresponding amendments have been made in the TDS provisions, and they remain unchanged. This means that despite the tax exemption, the payer (Post Office in this case) is still required to deduct TDS while making such payments to the assessee.

However, tax will not be deducted at source if the recipient submits Form 15G or Form 15H (for senior citizens) to the payer, declaring that their total income is below the taxable limit.

In your case, since you are not a taxpayer and not liable to file the ITR, you may submit the prescribed forms, depending upon your age, to prevent tax deduction at source.