Tax on NPS Withdrawal How to Save Tax on Withdrawing Fund

Tax on NPS Withdrawal: How to Save Taxes While Withdrawing Funds

The National Pension Scheme (NPS) is one of India’s most popular retirement savings schemes, providing a structured way to accumulate wealth for post-retirement years. While NPS offers tax benefits during the investment phase, withdrawals are subject to specific tax rules. Understanding these rules can help investors plan better and retain more of their retirement corpus.

Alongside tax planning for National Pension Scheme (NPS), reinvesting part of your withdrawals in safe instruments like Bajaj Finance Fixed Deposits can further optimize returns and provide guaranteed post-retirement income.

Understanding National Pension Scheme Withdrawal Rules

NPS withdrawals vary based on the subscriber’s age and the type of withdrawal. Broadly, they can be classified into three categories:

1. Partial Withdrawal

• Available after 3 years in NPS.
• Maximum withdrawal: Up to 25% of the subscriber’s contributions (excluding employer contributions).
• Purpose: Can be used for medical treatment, higher education, marriage, home purchase, or disability-related expenses.
• Tax Treatment: Completely tax-free under Section 10(12B) of the Income Tax Act.

2. Withdrawal at Retirement (Age 60 or Later)

• Up to 60% of the corpus can be withdrawn as a lump sum.
• Remaining 40% must be used to purchase an annuity plan.
• Tax Treatment:
  • 60% lump sum is tax-free.
  • 40% annuity portion is taxable as per the subscriber’s income tax slab.

3. Pre-Mature Exit (Before Age 60)

• Allowed after 10 years in NPS.
• 20% of the corpus can be withdrawn as a lump sum; remaining 80% must be invested in an annuity.
• Tax Treatment:
  • 20% lump sum is taxable as per the income tax slab.
  • 80% annuity portion is taxable in subsequent years.

Withdrawal Type	Taxability
Partial Withdrawal (up to 25%)	Tax-Free
Lump Sum at Retirement (60%)	Tax-Free
Annuity Purchase (40%)	Taxable as per income slab
Pre-Mature Exit (20% Lump Sum)	Taxable as per income slab
Pre-Mature Exit (80% Annuity)	Taxable as per annuity payouts

How to Save Taxes While Withdrawing NPS Funds

Smart tax planning can help you retain more of your retirement corpus. Here are some strategies:

1. Systematic Withdrawals
   • Spread the 60% lump sum over multiple financial years.
   • Keeps withdrawals within lower tax brackets, reducing tax liability.
2. Invest in a Tax-Efficient Annuity Plan
   • Select annuity plans with favorable post-tax returns to optimize income.
3. Reinvest Tax-Free NPS Withdrawals
   • The 60% tax-free amount can be invested in safe, tax-efficient instruments like Bajaj Finance Fixed Deposits.
   • FDs offer guaranteed returns and act as a secure avenue for wealth growth post-retirement.
4. Split Withdrawals Across Financial Years
   • Deferring part of withdrawals to the next financial year can lower taxable income in a given year.
5. Plan Annuity Payments Strategically
   • Choose annual or quarterly annuity payouts to optimize tax liability.
6. Spouse’s Income Planning
   • Buying annuities in a spouse’s name, if they fall under a lower tax bracket, can reduce the overall tax burden.
7. Joint Life Annuity for Family Security
   • Provides continuous income to the spouse while facilitating better tax planning.

Impact of NPS Withdrawal Taxation on Returns

Taxes directly affect the net returns from NPS. With careful planning, investors can maximize the benefits of their retirement corpus:

• 60% of the lump sum at retirement is tax-free.
• Annuity income is taxable, but proper payout structuring can minimize the impact.
• Reinvesting tax-free amounts into secure instruments like Bajaj Finance Fixed Deposits ensures continued wealth accumulation without additional tax burden.
• Spreading withdrawals over multiple years can reduce total tax liability and improve net returns.

Why Consider Bajaj Finance Fixed Deposits Alongside NPS

Bajaj Finance FDs are ideal for retirees seeking a safe and predictable income source:

• Attractive Interest Rates: Earn up to 7.30% p.a. for senior citizens and up to 6.95% p.a. for customers below 60 years.
• Flexible Tenures: Choose between 12 and 60 months, depending on your goals.
• Guaranteed Returns: Unlike market-linked investments, FD returns are assured.
• Loan Facility Against FD: Access funds without breaking your deposit.
• Safety: High credit ratings (CRISIL AAA/Stable & [ICRA]AAA(STABLE)) ensure security.

Reinvesting part of your NPS withdrawal into FDs can complement your retirement income strategy, providing both safety and growth.

Conclusion

Proper planning of NPS withdrawals is essential to maximise net retirement savings. By leveraging strategies such as systematic withdrawals, tax-efficient annuity choices, and reinvesting tax-free amounts into safe instruments like Bajaj Finance Fixed Deposits, retirees can enhance their post-retirement financial security.

Bajaj Finance FDs provide guaranteed returns, flexibility, and safety—making them an ideal complement to your NPS corpus. This approach ensures that more of your hard-earned savings remain with you, helping you achieve financial independence and a stress-free retirement.