Clipped from: https://www.thehindubusinessline.com/portfolio/personal-finance/tax-query-tax-on-nps-corpus-withdrawn/article70956580.ece
The entire taxable portion is treated as “Income from Other Sources” and taxed at the applicable slab rates
Under the non-government NPS rules, up to 80 per cent of the accumulated corpus can be withdrawn as a lumpsum, of which only 60 per cent is exempt from tax. Assuming a total corpus of ₹1 crore, if I withdraw ₹80 lakh as a lumpsum, ₹20 lakh would be taxable.
My understanding is that tax should be levied only on the capital gains component included in this ₹20 lakh, and not on the entire ₹20 lakh. Kindly confirm whether this interpretation is correct and advise on the applicable tax treatment.
Vijaykumar V, Pune
As per Schedule II read with Section 124 of the Income-tax Act 2025 [earlier section 10(12A) of the Income-tax Act,1961], up to 60 per cent of the total NPS corpus withdrawn at the time of closure/exit after (after age of 60) is exempt from tax, and the balance portion is taxable. Accordingly, in our example (₹1 crore corpus with ₹80 lakh withdrawn), ₹60 lakh is exempt; the remaining ₹20 lakh is fully taxable.
It is pertinent to note that unlike mutual funds, no distinction is made between principal and gains for NPS withdrawals. This is because NPS does not follow capital gains taxation principles—it is a deferred taxation regime, where: Contributions may have received tax benefits earlier, and accretions are not taxed annually. Therefore, the withdrawal (beyond the exempt 60 per cent) is taxed as income, not as capital gains.
The entire taxable portion is treated as “Income from Other Sources” and taxed at the applicable slab rates. Therefore, the understanding that only the capital gains component within the ₹20 lakh would be taxable is not in line with the current provisions.
Further, the remaining balance of 20 per cent of the corpus (₹1 crore – ₹80 lakh = ₹20 lakh) standing in the NPS account, is required to be utilised for purchase of an annuity plan. The tax implications in respect of the annuity are as follows:
* At the time of purchase of annuity: The amount utilised for purchase of the annuity is not taxable.
* During the pension phase: The annuity/ pension received periodically (monthly/quarterly/annually) is taxable in the hands of the recipient at the applicable slab rates in the year of receipt.
The author is a practising chartered accountant
Published on May 9, 2026
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