80CCD(1B) - NPS exemption

Your withdrawal is partially exempt. While 60% is tax-free under Section 10(12A), the remaining 40% is generally considered taxable income because you did not utilize it to purchase an annuity.

Under the provisions of the Income-tax Act, 1961, the taxability of withdrawal from the National Pension System (NPS) Tier-1 account depends on the nature of the withdrawal and the relevant sections of the Act.

1. Relevant Provision for NPS Withdrawal

The taxation of NPS withdrawals is mainly governed by Section 10(12A) and Section 80CCD of the Income-tax Act, 1961.

2. Exemption for Partial Withdrawal from NPS

As per Section 10(12B) of the Act:

·         Any partial withdrawal from NPS up to 25% of the contributions made by the subscriber is exempt from income tax, subject to conditions prescribed under the Pension Fund Regulatory rules.

·         This exemption applies only to withdrawals permitted under the NPS rules.

3. Withdrawal When Total Corpus Is Small

According to the rules framed by the Pension Fund Regulatory and Development Authority (PFRDA):

·         If the total NPS corpus at the time of exit is ₹5 lakh or less (earlier ₹2 lakh under old rules), the subscriber may withdraw the entire amount as a lump sum.

·         In such cases, 100% of the withdrawal is treated as exempt from tax under Section 10(12A) of the Income-tax Act, 1961.

4. Impact of Deduction Claimed Under Section 80CCD(1B)

You previously claimed deductions under Section 80CCD(1B) (additional ₹50,000 deduction for NPS contributions).

However:

·         If the withdrawal is made in accordance with NPS exit rules and the corpus is within the specified limit, the entire withdrawal remains exempt.

·         Therefore, the deduction claimed earlier does not become taxable again, provided the withdrawal qualifies under the exemption provisions.

5. Conclusion

Based on the facts you mentioned:

·         You withdrew the entire Tier-1 NPS balance because the corpus was below ₹2 lakh (as allowed by the system).

·         Such withdrawal is treated as a full exit with a small corpus.

·         Hence, the amount withdrawn is exempt from tax under Section 10(12A) of the Income-tax Act, 1961.

✅ Final Answer:
The withdrawal from your NPS Tier-1 account is not taxable, and the exemption is available under Section 10(12A) of the Income-tax Act, 1961, provided the withdrawal was made according to the NPS exit rules for a small corpus.