NPS is a voluntary contribution by an individual in a pension fund to enable him to draw pension after he attains 60 years of age. As per the scheme, the person is allowed to withdraw 60% of total savings as a lump sum at the time of retirement and the balance 40% is required to be used to purchase an annuity scheme from a life insurance company to get monthly pension for the rest of life.
As per section 10(12A) of the Income-tax Act, any payment from NPS, on closure of account or on opting out of the pension scheme, shall not be chargeable to tax to the extent it does not exceed 40% of the total amount payable to him.
Though as per the NPS scheme, a person can withdraw up to 60% of the total corpus, but Income-tax Act allowed an exemption up to 40% of the same. The Finance (No.2) Act, 2019 has increased the limit of exemption from 40% to 60% to make it in symmetry with NPS scheme. Thus, for Assessment Year 2020-21 the total amount allowed to be withdrawn from NPS shall be tax-free.