- Up to 60% of UPS and NPS corpus withdrawn at retirement is tax-free.
- Premature withdrawals before retirement are taxable as income.
- Annuity income from remaining 40% corpus is taxable as per income tax slabs.
Taxation Law Amendment 2025 brings important changes to how withdrawals from the Unified Pension Scheme (UPS) and National Pension System (NPS) are taxed. These updates explain how lump sum payments and annuity incomes are taxed, helping you plan your retirement savings better. If you are a UPS or NPS subscriber, knowing these changes is important for managing your pension withdrawals and tax responsibilities well.
Tax Exemptions on Lump Sum Withdrawals under UPS and NPS
According to the new amendment, any lump sum payment made from the NPS Trust to a UPS subscriber, which does not exceed 60% of the individual’s pension corpus at retirement, superannuation, or voluntary retirement, will be exempt from income tax. This means you can withdraw up to 60% of your accumulated pension fund tax-free when you retire.
This exemption is based on the notification number FX-1/3/2024-PR dated 24th January 2025 by the Department of Financial Services. The lump sum payment allowed is also linked to your qualifying service, calculated as 10% of your monthly emoluments (basic pay plus Dearness Allowance) for every six months of service completed. Importantly, this lump sum payment does not affect your assured pension payout.
Tax Implications of Premature Withdrawals from UPS and NPS
If you withdraw any amount from your UPS or NPS account before retirement, superannuation, or voluntary retirement, the entire amount received will be treated as taxable income in the year you get it. This includes any accrued income on the amount withdrawn.
Chartered Accountant Ashish Niraj explains that this rule makes sure that if you close your pension account or leave the scheme early, the amount you receive will be taxed as income for that financial year. Similarly, CA Mohit Gupta adds that any amount received on retirement or superannuation, where deductions were claimed earlier under Sections 80CCD(1), (1B), or (2), will be fully taxable in the year you get it.
Understanding the 60% Corpus Withdrawal Rule
Subscribers to UPS and NPS can withdraw up to 60% of their total pension corpus as a lump sum at retirement without paying any tax on this amount. The remaining 40% of the corpus must be used to buy an annuity, which will provide a regular pension income.
Tax Treatment of Annuity Income Post Retirement
The annuity income you receive from the remaining 40% corpus after retirement is taxable according to your individual income tax slab rates. This means the pension payments you get regularly will be added to your taxable income and taxed accordingly.
Transfer of Remaining Corpus to Pool Corpus and Its Tax Impact
If you transfer the remaining corpus to a pool corpus for annuity purchase at retirement, this transfer will not be considered taxable income. CA Ashish Niraj clarifies that this is simply a fund transfer for annuity purposes and does not attract any tax liability in the year of transfer.
Expert Opinions on Taxation Changes in UPS and NPS
CA Ashish Niraj: “The amendment explains taxation on premature withdrawals and makes sure that tax benefits claimed earlier are balanced by taxing the amount received on retirement or exit.”
CA Mohit Gupta: “Taxpayers should note that lump sum withdrawals up to 60% are tax-free, but annuity income is taxable. Planning withdrawals carefully can help you get the best tax benefits.”
Prabhakar K S, Founder & CEO, Shree Tax Chambers: “From April 1, 2025, any amount received on retirement will be taxed in the year you get it. The 60% tax-free withdrawal rule and mandatory annuity purchase with the remaining 40% are key changes to keep in mind.”
These changes in the Taxation Law Amendment 2025 aim to bring uniform tax treatment between UPS and NPS subscribers. If you are planning your retirement corpus withdrawals, knowing these rules will help you make smart decisions and avoid unexpected tax burdens.
| Key Aspect | Details |
|---|---|
| Tax-free lump sum withdrawal | Up to 60% of corpus at retirement or superannuation |
| Tax on premature withdrawal | Treated as taxable income in year of receipt |
| Annuity purchase requirement | Remaining 40% corpus must be used to buy annuity |
| Tax on annuity income | Taxable as per individual income tax slabs |
| Transfer to pool corpus | Not taxable when transferring corpus for annuity |
| Effective date | April 1, 2025 |
| Official Website | https://financialservices.gov.in |
For more details, you can visit the official Department of Financial Services website: https://financialservices.gov.in.