Will Budget 2025 make partial withdrawal from NPS tax-free for all subscribers? Here's what ICAI suggests

Over the years, the government has implemented various measures to ensure the National Pension System (NPS) is equally attractive to all subscribers, including those who are not formally employed.

However, there is one provision where non-employee NPS account holders are not treated in the same manner as the employee subscribers. This is related to the taxation of partial withdrawal from NPS accounts.

According to NPS rules, partial withdrawals are allowed after three years from the date of joining. NPS account holders can withdraw up to 25% of their own contributions to the scheme, excluding any employer contributions.

Section 10 (12B) of the Income-tax Act 1961 allows tax exemption on partial withdrawals by employees when the amount is not more than 25% of their own contribution. However, this facility is not available to non-employee subscribers.

Other tax benefits under NPS

Investment in this scheme qualifies for deduction under section 80C of the Income-tax Act 1961, subject to a limit of ₹1.5 lakh per financial year. An additional deduction of ₹50,000 is also allowed under section 80CCD(1B), meaning an individual can claim a deduction of up to ₹2 lakh from his taxable income by simply investing in this scheme.

As per section 10(12A), tax exemption is allowed for up to 60% of the total amount payable to the NPS subscriber on the closure of account.

The benefit of exemption under section 10(12A) was initially available only to employees. But it was extended by the Finance Act, 2018 to all accountholders, to provide a level playing field to both employee and non-employee subscribers.

Limit on partial withdrawal

Partial withdrawal from NPS can be made only three times during the entire tenure of the NPS account. In each withdrawal, subscribers can withdraw a maximum of 25% of the contributions made by them after the previous withdrawal.