How is the tax calculated on withdrawal of funds from National Pension System (NPS) Tier 2 account? Should I take it as capital gain and calculate taxes on the gains treating it as an equity mutual fund (since my major contribution is in equities)? Or, should I file a tax return, considering it a part of the income? Also, do I have to pay tax only on the interest or on the entire amount withdrawn? Taxes on invested money are already considered in the previous investment year.
Name withheld on request
There are no specific provisions in the Income Tax Act, 1961 governing the taxation of withdrawals from the NPS Tier II account. Thus, the tax liability of withdrawals from this account needs to be analyzed on the basis of general principles of taxation. In the absence of specific provisions, differing views exist in this regard.
it is understood that Investment The NPS account is held in the form of units, the Net Asset Value (NAV) of which varies over time. Therefore, there is a view that at the time of withdrawal, these units are redeemed and hence the profit/loss arising out of it can be taxed under the head ‘Capital Gains’.
However, it may be noted that units held in NPS account cannot be treated as equity shares of a company or units of equity-oriented fund and hence a holding period of 36 months is applicable for determining its tax rate. can be done. The tax rate will depend on whether the units end up being classified as short term or long term.
There is also an alternative school of thought which states that withdrawals may be offered to tax as ordinary income under the head “Income from other sources”, that is, the redemption value and the amount invested (i.e., accretion only). away from the gap between While there is no provision for this.
Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG in India.
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