This Pune resident saved ₹10 lakh in tax by transferring his pension fund to NPS

Mint

05-05-2025

Pune resident Amit Upadhyay (46) had a large sum of money in a superannuation fund. Contributing to it was compulsory after achieving a certain level of seniority at his previous employer, where he worked for 20 years. "The contributions were a tax-free component of my salary and interest too was not taxable, so I happily went ahead with it," he said.
When he moved on to a new job, the second employer had no provision for a superannuation fund, so Upadhyay left his investment as it was. By 2017 it contained
₹
33 lakh. Had he withdrawn it, it would have become his taxable income for the year. Being in the 30% tax bracket, he would have had to pay nearly
₹
10 lakh (30% of
₹
33 lakh) excluding cess and surcharge. If he waited until he turned 60, he would have received a third of it tax-free while the rest would have to be used to buy an annuity. "I did not want to pay such a huge amount of tax by withdrawing it prematurely," he said.
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Preeti Sharma, partner, global employer services, tax & regulatory services, BDO India, said, 'There are very few approved funds that allow 100% commutation/lump sum withdrawal at the time of retirement. In such a situation, a third of the amount is tax-exempt and the balance is fully taxable.
"However, if the balance is invested in an annuity, the employee is not required to pay any tax on it, though the pension from the annuity will be taxed… Any withdrawal before the age of retirement, other than in the event of death, is fully taxable."
Union Budget 2017 delivered good news for Upadhyay, as then finance minister, the late Arun Jaitley, announced that a recognised provident fund/superannuation fund could be transferred one-time to the National Pension System (NPS) without any tax liability. "I got hold of the PFRDA (Pension Fund Regulatory and Development Authority) circular. Now I had to reach out to my first employer to start the process," Upadhyay said.
The process was simple but time-consuming. "My employer was collecting individual requests from different employees so it could take them up with LIC, which manages the superannuation fund, in one go," he said.
Private employees had to follow following steps for the one-time transfer. The very first requirement was an active NPS tier-1 account, which Upadhyay had. They then had to reach out to the superannuation fund manager (LIC in this case) via the employer, requesting it to transfer the funds to the NPS account.
The superannuation fund manager would then issue a cheque or draft in the name of the point of presence (PoP) associated with the employer, with the Permanent Retirement Account Number (PRAN) of the employee mentioned. POPs are PFRDA-appointed entities that provide NPS services to subscribers. PRAN is a 12-digit number assigned to individuals enrolled in NPS.
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It would also issue a letter to the employer or PoP, mentioning that the amount was being transferred from the superannuation fund to the NPS tier-1 account. Finally, the PoP would collect the amount and transfer it to the NPS account.
The PFRDA circular read, 'As per provisions of the Income Tax Act, 1961, the amount so transferred from recognised provident fund/superannuation fund to NPS is not treated as income of the current year and hence not taxable. Further, the transferred recognised provident fund/superannuation fund will not be treated as contribution of the current year by employee/employer and accordingly the subscriber would not make income tax claim of contribution for this transferred amount."
However, since Upadhyay had moved on to a new job, two POPs were involved. "My first employer only knew how to proceed with the POP associated with it. The second employer had a different POP. Both of my employers supported me and the cheque finally arrived in the name of the POP of my second employer. They deposited it in my NPS account," he said.
Though money had been transferred, Upadhyay still cannot access it. "Now, NPS rules will apply to my funds. If I withdraw it now, 20% will be tax-free while the rest will be converted into an annuity. But if I hold it to retirement, 60% of the funds can be withdrawn tax-free. That was not the case with the superannuation fund. Moreover, I presume returns will be better with NPS than with the superannuation fund," he said.
Sumit Shukla, managing director and CEO, Axis Pension Fund, said, 'Moving a superannuation fund to NPS is a win-win for employees and employers as the latter won't have to manage a separate trust and incur administration costs, while the former will get investment choices under NPS with better returns and features."
To be sure, the 2017 budget announcement for one-time transfers applies to the Employee Provident Fund (EPF), too, but unlike PFRDA, the EPFO is yet to define a process for it.
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