New Income-Tax Bill 2025: Lumpsum withdrawal tax relief, new rules for early exits in UPS, NPS

The Lok Sabha on Monday, August 11, approved the updated Income-Tax (No. 2) Bill, 2025, a landmark move to replace the Income-Tax Act, 1961, which has been in force for over sixty years. Finance Minister Nirmala Sitharaman introduced the revised draft after withdrawing an earlier version tabled this year. The new Bill reflects the bulk of the 285 recommendations submitted by a Parliamentary Select Committee. Among its key features are expanded tax concessions for pensioners and for subscribers to the National Pension System (NPS) and Unified Pension Scheme (UPS). Designed to streamline the tax code, cut down on disputes, and modernise compliance mechanisms, the legislation now awaits debate in the Rajya Sabha.

The primary aim of the legislation is to align the tax treatment of the recently launched Unified Pension Scheme (UPS) with that of the National Pension System (NPS). It also includes provisions for certain direct tax benefits to public investment funds from Saudi Arabia.

Tax exemptions for UPS

Under the Bill, payments from the NPS Trust to a UPS subscriber—up to 60% of the total corpus—will be exempt from income tax when received at the time of superannuation, voluntary retirement, or retirement. The exemption applies to amounts specified in the January 24, 2025, notification issued by the Department of Financial Services.

This change implements the government’s earlier announcement that all tax benefits available under NPS would also apply to UPS, effective from April 1, 2025. Post-enactment, a UPS subscriber can withdraw up to 60% of their accumulated pension corpus tax-free upon retirement, with the remainder used to purchase an annuity.

However, any amount received from the scheme before superannuation, voluntary retirement, or retirement will be treated as taxable income in the year it is withdrawn. This applies both to the subscriber and to their nominee.

Amit Maheshwari, Tax Partner at AKM Global, said the measure is “a central feature of the Bill” and is designed to enhance the attractiveness of UPS. “The Bill aligns tax laws with pension reforms, international investment agreements, and procedural clarifications. It grants exemptions for specific payouts, making the new pension system more appealing for subscribers,” he noted.

According to the law, a lump-sum payment at retirement will be allowed at 10% of monthly emoluments (basic pay plus dearness allowance) for every six months of qualifying service, without reducing the assured pension payout.

CA Mohit Gupta explained the broader tax treatment: if a subscriber has claimed deductions under Section 80CCD(1), (1B), or (2), then the entire amount withdrawn before qualifying retirement conditions—along with accrued income—will be considered taxable in the year of receipt.

Other changes

The Bill proposes a new framework for “retirement benefit accounts” to be maintained by approved funds. Withdrawals at retirement from such accounts will be exempt from tax if they meet prescribed conditions, aiming to promote structured retirement savings.

The current deduction for family pension remains unchanged—allowing one-third of the pension or ₹15,000, whichever is lower, to be deducted from taxable income. This applies to pensions paid to the spouse or dependents of a deceased employee.

Specific provisions will govern the tax treatment of partial withdrawals from pension schemes before maturity, reducing disputes and providing certainty for taxpayers.

Expert insights

Vibhore Goyal, Founder at OneBanc, said: "The new pension tax reforms are a welcome step in aligning retirement incentives with long-term savings goals. But clarity will be key. For example, for someone retiring with a ₹1 crore corpus, the 60% tax exemption translates into ₹60 lakh of tax-free savings, a meaningful boost. Yet, how will this interact with other retirement benefits to avoid double taxation or the loss of deductions worth several lakh? Will the 10% lump-sum benefit, potentially ₹5–10 lakh for many professionals, be calculated uniformly across employers, or will variations create compliance and dispute risks? From a fiscal perspective, if even 5 million retirees avail of these benefits, the revenue foregone could run into ₹25,000–₹30,000 crore over a decade; will this be absorbed by growth, or passed on indirectly to future taxpayers? And with barely 1.37% of the ~23 lakh eligible UPS subscribers opting in so far, is the reform addressing the right population, or is it a high-cost benefit for a small base? These are not criticisms, but essential questions to ensure that well-intentioned reforms translate into real, frictionless benefits for retirees, without the fine print eroding the intended gains."

Objective Impact

The Finance Ministry said the pension-related provisions are intended to create uniformity across different pension schemes, reduce legal ambiguity, and give retirees greater certainty about post-retirement income. Aligning UPS and NPS tax rules is expected to ensure a level playing field and boost confidence in the newly launched system.

Alongside pension reforms, the Bill also contains measures granting certain direct tax benefits to public investment funds from Saudi Arabia, reflecting ongoing efforts to strengthen bilateral investment relations.

This legislation marks a significant shift in pension taxation policy, offering retirees more clarity while safeguarding tax revenue from premature withdrawals. If approved by the President, the changes will take effect from the current financial year.