Changes in tax on lumpsum and premature withdrawals under UPS and NPS in the latest version of Income Tax Bill
Aug 11, 2025
Synopsis
FM Nirmala Sitharaman introduced the Taxation Law (Amendment) Bill, 2025, in Lok Sabha, aiming to align the tax treatment of the Unified Pension Scheme (UPS) with the National Pension System (NPS). The bill proposes income tax exemptions for UPS payments up to 60% of the corpus at retirement. Also, in case a UPS subscriber or their nominee receives funds from the scheme before their superannuation, retirement or voluntary retirement, it will be taxable in their hands.
FM Nirmala Sitharaman, in today’s Lok Sabha session, introduced the Taxation Law (Amendment) Bill, 2025, which is further set to amend the Finance Act, 2025 and the Income Tax Act, 1961. Most of the changes herein focus on bringing UPS on par with NPS in terms of tax treatment. Here are some major changes that have been presented in the Taxation Law (Amendment) Bill.
Income tax exemptions for UPS
As per the bill, any payments from the NPS Trust to a UPS (United Pension Scheme) subscriber, which do not exceed 60% of the individual's corpus at the time of superannuation, voluntary retirement or retirement, shall be exempt from income tax..
According to the bill, “any payment from the National Pension System Trust to an assessee, who is a subscriber to the Unified Pension Scheme, to the extent that it does not exceed sixty per cent of the individual corpus, as specified in notification number FX-1/3/2024-PR, dated the 24th January, 2025 of the Department of Financial Services, made at the time of his superannuation or voluntary retirement or retirement under clause (j) of rule 56 of the Fundamental Rules [which is not treated as penalty under the Central Civil Services (Classification, Control and Appeal) Rule.”
Furthermore, the bill states that, “any sum received as a lump sum amount as per clause (vi) of paragraph 2 of the notification number FX-1/3/2024-PR, dated the 24th January, 2025, of the Department of Financial Services, by an assessee being a subscriber to the Unified Pension Scheme will also be tax exempt.
As per law, a lump sum payment will be allowed on superannuation at the rate of 10% of monthly emoluments (basic pay + Dearness Allowance) for every completed six months of qualifying service. Moreover, this lump sum payment will not affect the quantum of assured payout.
The bill further adds that, “where any amount standing to the credit of the assessee, being a subscriber to the Unified Pension Scheme, in his account referred to in sub-section (1) or sub-section (1B), in respect of which a deduction has been allowed under those sub-sections or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year on account of his superannuation or voluntary retirement or retirement under clause (j) of rule 56 of the Fundamental Rules [which is not treated as penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965], as may be applicable, the whole of the amount shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.”
Simply put, if the UPS subscriber or their nominee receives any amount from the scheme before their superannuation, retirement or voluntary retirement, the same will be treated as income in the hands of the individual and taxed accordingly.
As CA Ashish Niraj, Partner, A S N & Company Chartered Accountants explains, this subsection has been inserted to clarify that in case the assesee closes the account or opt out of pension scheme referred to in sub-section (1) or sub-section (1B) then such amount will be deemed to be his income in that previous year and will be taxed.
Adds CA Mohit Gupta, “if an assessee (subscriber to the Unified Pension Scheme) receives any amount (including accrued income) from their pension account—where deductions were claimed earlier under Section 80CCD(1), (1B), or (2)—on superannuation, voluntary retirement, or retirement under Rule 56(j) of the Fundamental Rules (not treated as penalty), the entire amount will be treated as taxable income in the year of receipt”.
According to CA Gaurav Makjhiani, tax lead at Roedl & Partner, this clarification is introduced to ensure complete parity in tax treatment between the two schemes. For relevant employees, this removes a major barrier to adopting UPS, as the same deductions for contributions and exemptions on withdrawals are now assured.
Furthermore, according to the bill, if the balance outstanding in the individual corpus is transferred to the pool corpus on his superannuation, voluntary retirement or retirement, the same will not be treated as income of the assessee in that year. As per CA Ashish Niraj, Partner, A S N & Company Chartered Accountants, this is merely shifting funds from individual corpus to pool corpus for annuity purposes, and hence, does not invite taxes.
[The Economic Times]
