New Tax Bill Brings Major Changes for Pensions and Withdrawals
The Lok Sabha has approved the new Income-Tax (No. 2) Bill, 2025, which aims to replace the 60-year-old Income-Tax Act of 1961. This landmark legislation, introduced by Finance Minister Nirmala Sitharaman, is designed to streamline the tax code and provide more clarity for retirees and pension subscribers. The bill now heads to the Rajya Sabha for debate.
Key Highlights of the Bill
Lumpsum Withdrawal Tax Relief
The bill’s central feature is the alignment of tax rules for the new Unified Pension Scheme (UPS) with the existing National Pension System (NPS). This change fulfills a government promise to grant the same tax benefits to both schemes.
- Tax-Free Lumpsum: Upon retirement, superannuation, or voluntary retirement, subscribers to both the UPS and NPS can withdraw up to 60% of their accumulated pension corpus completely tax-free. The remaining 40% must be used to purchase an annuity.
- Commuted Pension: The bill also provides for a full tax exemption on the commuted portion of pension payouts under the UPS, similar to existing provisions for other schemes.
New Rules for Early Withdrawals
To discourage premature withdrawals and ensure pension funds are used for their intended purpose, the bill establishes clear rules for early exits.
- Taxable Income: Any amount withdrawn from the UPS before qualifying retirement conditions are met will be considered fully taxable income in the year it’s received.
- Deduction Clawback: If you have claimed tax deductions under Section 80CCD, any early withdrawal—including the initial contribution and accrued income—will be subject to taxation.
Other Significant Provisions
- Retirement Benefit Accounts: The bill proposes a new framework for “retirement benefit accounts” to encourage structured savings. Withdrawals from these accounts will be tax-exempt at retirement if they meet specific conditions.
- Clarity on Family Pension: The existing rule for family pension deductions remains unchanged. Dependents of a deceased employee can still deduct one-third of the pension or ₹15,000, whichever is lower, from their taxable income.
- International Agreements: The legislation also includes provisions granting direct tax benefits to certain public investment funds from Saudi Arabia, a move aimed at strengthening international investment relations.
These changes, which are expected to take effect from the current financial year if approved by the President, are intended to create a level playing field for different pension schemes and give retirees more certainty about their post-retirement income.