Finance, Audit and Taxation: Complete Notes

This note brings together how the Authority is funded and held to account for its money, and how NPS subscribers are taxed: grants, the Pension Regulatory and Development Fund and the Authority's tax exemption; accounts and audit by the CAG; and the income tax treatment of NPS contributions, returns and withdrawals under the Income-tax Act, 2025.

1. Grants, the Fund and Tax Exemption (Sections 34, 39 and 40)

Grants (Section 39): by the Central Government, after appropriation by Parliament, for the purposes of the Act.
Pension Regulatory and Development Fund (Section 40): receives grants, fees and charges and other Government-approved sums; pays salaries and other expenses of the Authority.
Fees (Section 14(2)(m)): levied on intermediaries, balanced against the duty to keep costs reasonable.
Separate penalty fund: penalties go to the Subscriber Education and Protection Fund (Section 41), not the operating fund.
Tax exemption (Section 34): notwithstanding the tax laws, no wealth-tax, income-tax or other tax on the Authority's wealth, income, profits or gains; continues under the Income-tax Act, 2025; does not cover GST.

2. Accounts and Audit (Section 42)

Accounts: proper accounts and an annual statement in the form prescribed by the Government in consultation with the CAG.
Audit: by the CAG, at intervals the CAG specifies, at the Authority's cost.
Powers: as in Government audit: demand books and documents and inspect offices.
Parliament: certified accounts and the audit report sent annually to the Government and laid before each House.
Scope: the Authority's funds, not the subscribers' NPS corpus, which is audited under PFRDA's regulations.

3. Taxation of the NPS

Governing law: the income tax law, from 1 April 2026 the Income-tax Act, 2025; NPS provisions in Section 124 (formerly 80CCD).
Own contributions: up to 10% of salary (20% of gross total income if self-employed) within ₹1.5 lakh, plus ₹50,000 extra; old regime only.
Employer contributions: 14% (Government; all employers under the default regime) or 10% (others, old regime); ₹7.5 lakh aggregate perquisite cap.
Accumulation: tax-free; NPS Trust income exempt.
Withdrawal: 60% of the corpus exempt on exit; the extra 20% allowed from 2025 reported as taxable; partial withdrawals up to 25% of own contributions exempt; annuity income taxable; amounts received by a nominee on death not the subscriber's income.
Special cases: NPS Vatsalya within the ₹50,000 limit; Tax Saver Tier II within ₹1.5 lakh; ordinary Tier II no deduction; UPS given NPS tax treatment.

4. Money and Accountability

The financial provisions of the Act serve two ends. They give the Authority the resources and a measure of financial independence needed for effective regulation, while keeping its finances under the control of Parliament through appropriation, CAG audit and laying of accounts. The tax law, meanwhile, shapes subscriber behaviour, and its alignment with PFRDA's withdrawal rules remains an ongoing policy concern.

⚠ Key point

The Authority is funded by grants after parliamentary appropriation (Section 39) and by fees and charges, credited to the Pension Regulatory and Development Fund, which meets its salaries and expenses (Section 40); penalties go to the SEPF. It is exempt from tax on its wealth and income (Section 34). Its accounts are audited by the CAG and laid before Parliament (Section 42). Subscribers are taxed under the Income-tax Act, 2025 (Section 124): contributions are deductible within limits (employer contributions even under the default regime), returns grow tax-free, 60% of the exit corpus is exempt, and annuity income is taxable.

5. Related Topics and Provisions

Subscriber Education and Protection Fund (Sections 29 and 41)
Central Government control: returns and reports (Sections 43 to 46)
Exit, withdrawal and annuity under the NPS
NPS versus EPF and PPF