EEE tax regime

Most savings products are taxed somewhere along the way — when you put money in, while it grows, or when you take it out. A product under the EEE tax regime is meant to be exempt at all three stages: contribution, earnings and withdrawal.

The workbook places the NPS in this category, though — as with most real tax rules — the exit stage carries some fine print.

The three "E"s, as the workbook applies them to the NPS:

1. Contribution (Exempt): The subscriber gets a tax deduction at the time of investing — up to Rs 1.5 lakh under section 123 read with Schedule XV (old section 80C), plus an additional Rs 50,000 under section 124(3) (old section 80CCD(1B)), plus employer contributions deductible separately under section 124(1)/(2) up to 14% of salary for Government employees and 10% (or 14%, under the new regime) for others — subject to an aggregate Rs 7,50,000 per year cap on combined employer contributions across recognised PF, NPS and superannuation fund together.
2. Earnings (Exempt): There is no tax implication while the contributions earn returns during accumulation — returns show up only as a change in NAV, untaxed until exit.
3. Exit (largely Exempt, with conditions): Payment from the NPS Trust on closure or opting out is exempt up to 60% of the total amount payable. The amount used to purchase an annuity is not taxed at the time of purchase — but the annuity income received later is taxable as income of the annuitant in the year received.

A further nuance: a Non-Government subscriber may withdraw up to 80% of the corpus as a lump sum, but only the first 60% is tax-free — the portion of the lump sum above 60% is taxable, even though it was validly withdrawn under the exit rules.

Mr Verma contributes Rs 1.5 lakh to his NPS Tier I account in a year, claiming the full section 123 deduction, plus an additional Rs 50,000 under section 124(3) — Rs 2 lakh of tax-deductible contribution in total, reducing his taxable income by that amount (Exempt at contribution).

Over 25 years his corpus grows to Rs 1.2 crore; none of the year-on-year NAV growth is taxed along the way (Exempt on earnings).

At exit, as a Non-Government subscriber, he withdraws 80% of the corpus — Rs 96 lakh — as lump sum. Of this, only the first 60% (Rs 72 lakh) is tax-free; the remaining Rs 24 lakh (the 60–80% slice) is taxable in his hands. The balance 20% (Rs 24 lakh) goes to buy an annuity — that purchase itself is untaxed — but the annuity income he later receives every month is fully taxable as his income in the year received. The scheme is called EEE, but his actual outcome at exit is not a clean, unconditional exemption.

Chapter 4, section 4.5 (Tax aspects of subscribing to the NPS), states plainly that "the NPS comes under EEE tax regime" and then works through each of the three stages with figures. Expect a direct recall of the label, plus the numeric limits at each stage — Rs 1.5 lakh, Rs 50,000, the 14%/10% employer limits, the Rs 7.5 lakh aggregate cap, and the 60% exit exemption.

• The exit stage is not a clean, unconditional exemption — only 60% of the withdrawal is tax-free even where 80% can be taken as lump sum; the 60–80% slice is taxable.
• The amount used to buy an annuity is exempt only at the point of purchase. The annuity income received afterwards is fully taxable — the label "EEE" describes the corpus's tax treatment, not the pension income that eventually flows from it.
• Rs 50,000 under section 124(3) is available only if the same amount is not also claimed under section 123 — the two deductions cannot double-count the same contribution.
• The Rs 7,50,000 cap is an aggregate across recognised PF, NPS and approved superannuation fund employer contributions combined, not a separate Rs 7.5 lakh ceiling for NPS alone.