How your NPS Tier II account withdrawals are taxed
4 min readNational Pension System (NPS) has two kind of accounts: Tier I and Tier II. Tier I account is the principle account and is necessary whereas opening of Tier II account is non-compulsory. Tier II account is sort of a saving checking account the place you may deposit and withdraws cash as and whenever you need. One can switch cash anytime from Tier II account to Tier I account and never vice versa. All subscribers are eligible for tax advantages for contributions made to Tier I account however tax advantages for Tier II account contributions can be found solely to central authorities workers with three years lock-in interval. Since there are not any particular provisions for taxation of withdrawals from Tier II account beneath the regulation, I assumed I’ll attempt to clarify how such withdrawals must be taxed logically?
Are the withdrawals from Tier II account taxable?
As per Section 10 (12A) of Income Tax Act, 60% of the quantity withdrawn on closure or on the time of opting out from the account referred to in Section 80 CCD are tax-free within the arms of the subscriber. Likewise, on the time of partial withdrawals 25% of subscriber’s contribution, from the account referred to in Section 80 CCD comes tax-free as per Section 10 (12B). Section 80 CCD implied refers solely to Tier I account as a result of deduction beneath this part is on the market just for contribution to Tier I account and never for contributions made to Tier II account for which deduction is on the market beneath Section 80C(2)(xxv).
There is not any particular and direct provision for taxation of withdrawal from Tier II account beneath the Income Tax Act. If tax regulation doesn’t have any particular provisions for taxation of an merchandise, it doesn’t by default turns into tax-free or taxable. In such a state of affairs one has to use the logic and take assist of different provisions of the identical regulation. The full worth of the cash withdrawn from Tier II account can’t be taxed because the regulation makers wouldn’t have contemplated taxing one thing on the time of withdrawal if no tax profit has ever been claimed when the cash was deposited. But this doesn’t imply that the complete quantity withdrawn would come tax free. The withdrawals from Tier II account are like common withdrawals out of your saving checking account, which aren’t taxed besides to the extent of curiosity earned.
For arriving on the logical guidelines for taxation of Tier II account withdrawals I take assist from provisions of Section 80CCC. Section 80CCC (1) offers for deduction of premium paid to purchase an annuity. Section 80 CCC (2) offers for taxing of give up worth of such coverage which restricts the taxability to the extent to which the tax advantages beneath Section 80 CCC(1) have been claimed by the person and never past that besides the accretion to the funding. The identical logic must be utilized right here.
How the withdrawals ought to logically be taxed
Due to the explanations defined above I’m of the sturdy opinion that entire of the cash withdrawn from Tier II account can’t be taxed by any stretch of creativeness. What can and may logically be taxed is the appreciation, if any within the worth of investments as comprised within the withdrawals.
Since the funding made in Tier II account doesn’t carry any fastened fee of return like fastened deposits or bonds or debenture, the appreciation within the worth of investments can’t be taxed beneath the pinnacle “Income from different sources”. As a subscriber is allotted items for his investments in numerous classes of funds like of fairness, company bonds and authorities securities at their Net Asset Value (NAV) on the time of funding, it’s logical to deal with contribution to tier II account as investments and deal with any income thereon as capital positive aspects.
Since funding in NPS can neither be referred to as listed fairness shares nor might be handled as items of fairness mutual funds, it shall turn out to be long run provided that the items are bought after 36 months. Since Securities Transactions Tax (STT) shouldn’t be paid on the time of redemption, the identical can’t be taxed as fairness oriented schemes beneath Section 112A even in respect of the fairness element. It shall be taxed at flat of 20% after indexation if held for greater than 36 months. If the items are redeemed inside 36 months, the income on redemption is to be handled as brief time period capital positive aspects and to be included in your common earnings which can get taxed on the slab fee relevant to your whole earnings.
The distinction between NAV of buy and redemption must be multiplied by the variety of the items used for redemption to reach on the revenue on realised on redemption of particular transaction.
Please be aware that no matter I’ve talked about shouldn’t be the precise authorized place in absence of particular and direct provision within the Income Tax Act however is solely my opinion arrived at with the assistance of widespread sense and logic. In view of the confusion surrounding tax on withdrawal for Tier II account, it’s the obligation of the federal government to make the authorized place clear as early as doable. This will assist many individuals to take the choice to avail the advantage of low price funding avenue of Tier II account.
Balwant Jain is a tax and funding knowledgeable and might be reached at jainbalwant@gmail.com
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