Tier II NPS account: Clarity wanted about taxation of withdrawals
National Pension System (NPS), a low price retirement product, was launched by the federal government to assist folks accumulate corpus for his or her retirement. As per NPS construction one can open two accounts; Tier I and Tier II. Tier I additionally known as pension account and is the primary retirement account which is necessary. Tier II is sort of a saving account to park your surplus funds which you’ll withdraw anytime and is optionally available. You can switch cash from Tier II account to Tier I account and never vice versa. Though tax advantages for contribution to Tier I account can be found to all subscribers however deduction for Tier II contributions can be found solely to central authorities staff with three years lock-in-period. The taxation guidelines for Tier I account are clear however there isn’t a make clear about taxation of withdrawals from Tier II account. In this text I want to clarify how the withdrawal from Tier II account ought to be taxed.
Should the withdrawals from Tier II account be totally taxable ?
As per Section 10 (12A) of Income Tax Act withdrawals from the scheme referred to in Section 80CCD are exempts upto 60% on closure of the account or on the time of opting out of scheme. For the stability 40% you need to purchase an annuity. Likewise, as per Section 10 (12B) 25percentof contribution made by you from scheme referred to in Section 80CCD is exempt on partial withdrawal. Since deduction is obtainable just for contribution made to Tier I account the Section 80CCD by implication refers solely Tier I account and to not Tier II account. Moreover, Section 80C(2)(xxv), which permits deduction to central authorities worker, particularly refers to Tier II account.
Any legislation can’t anticipate and supply for all of the doable circumstance. If there isn’t a provision for taxation of any particular merchandise, such merchandise must be taxed making use of logic and customary senses. If no tax profit is claimed on contributions, by easy logic complete of the quantity acquired on maturity or withdrawal can’t be taxed. In my opinion, since Tier II account is like your saving checking account the place you’re allowed to deposit and withdraw as and whenever you need, it’s only the accretion within the Tier II account, like curiosity on saving checking account, ought to solely be taxed and never complete of the quantity.
I draw help for my logic from the authorized provisions for annuity deduction beneath Section 80CCC. One can declare deduction for premium paid to purchase an annuity beneath Section 80CCC(1). When an individual surrenders the annuity coverage the taxation of such give up worth will depend on whether or not the individual had availed deduction beneath Section 80CCC (1) or not. In case tax profit was claimed all the quantity acquired on give up of the annuity coverage will get taxed however in case no deduction was claimed solely the accretion to the premium paid will get taxed. Likewise, since no deduction for contribution to Tier II account is mostly obtainable, solely the appreciation over quantity of your contributions ought to be taxed and never all the quantity of withdrawal throughout forex of the account or on its closure.
Under which head of earnings the appreciation ought to be taxed?
On the premise of above dialogue, it turns into clear that by no stretch of creativeness all the cash on withdrawal from Tier II account may be taxed however solely the quantity of appreciation may be taxed on withdrawals. As the contribution made in direction of NPS Tier II account doesn’t earn you any mounted price of return like mounted deposits or bonds or debenture, the differential quantity can’t be taxed as curiosity beneath the pinnacle “Income from different sources”.
When you contribute towards Tier I and Tier II account, particular variety of items beneath varied classes like fairness and debt are allotted to you based mostly on the Net Asset Value (NAV) on the date of contribution, the contribution made is nothing however an funding and thus a capital asset in my humble opinion.
When you withdraw the cash, particular variety of items are redeemed. So contribution and withdrawal works on the identical line as investments and redemption of mutual funds. The distinction between NAV of contribution date and withdrawal date must be multiplied by the variety of the items used for redemption to reach on the revenue realised on withdrawal.
Since funding in NPS can neither be categorised as listed fairness shares nor items of fairness mutual funds, your contribution turns into long run solely after 36 months. Moreover, since no Securities Transactions Tax (STT) is levied by the pension fund supervisor on the quantity of withdrawal, the identical can’t be taxed beneath Section 111A or 112A, as fairness oriented schemes even in respect of your fairness element. Therefore, long run capital features will get taxed at flat 20% after indexation if held for greater than 36 months and the brief time period capital features added to your different earnings and taxed at slab charges.
Let me reiterate that no matter is defined right here just isn’t strictly as per the authorized provision as there are none beneath the Income Tax Act however is simply my private opinion based mostly on widespread sense. In view of the confusion surrounding tax on withdrawal from tier II account, the federal government ought to ideally make the authorized positions clear as quickly as doable. This will assist many individuals to take the choice to avail the good thing about low price funding avenue.
Balwant Jain is a tax and funding professional and may be reached at jainbalwant@gmail.com and @jainbalwant on Twitter.
Subscribe to Mint Newsletters * Enter a sound electronic mail * Thank you for subscribing to our e-newsletter.
Never miss a narrative! Stay linked and knowledgeable with Mint.
Download
our App Now!!
