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Partial withdrawal from NPS: How is it taxed for house construction?

Ramalingam

Ramalingam Kalirajan  |9730 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Feb 06, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Naz Question by Naz on Feb 03, 2025Hindi
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How partial withdrawal from NPS Tire 2 account for house building construction will be taxed? Is it true that Principle/invested amount also attract tax ?

Ans: NPS Tier 2 is a voluntary savings account linked to NPS. It allows flexible withdrawals. However, the taxation rules for withdrawals are different from NPS Tier 1.

Understanding Tax on NPS Tier 2 Withdrawals
1) Entire Withdrawal is Taxable
Withdrawals from NPS Tier 2 do not get any tax exemption.

The entire amount, including the principal and gains, is taxed as per your income slab.

2) No Special Tax Benefits for House Construction
There are no separate tax exemptions for withdrawing from NPS Tier 2 for house construction.

Unlike NPS Tier 1, which has some tax-free components, Tier 2 is treated like a regular investment.

3) Principle Amount is Also Taxed
The invested amount (principal) was not taxed earlier because there was no tax benefit on investment.

However, when withdrawn, it is added to your total income and taxed as per your slab.

4) Tax Deducted at Source (TDS) May Apply
If the withdrawal amount is large, TDS may be deducted.

The withdrawn amount is still subject to final tax calculation based on your total income.

Better Alternatives for Funding House Construction
If you need funds for house construction, consider other investment withdrawals that have tax benefits.

Withdrawing from a mutual fund with long-term capital gains benefit may be more tax-efficient.

Fixed deposits may be an option, but the interest earned is taxable.

Finally
NPS Tier 2 withdrawals are fully taxable.

The entire amount, including the principal, is added to your income.

There is no special tax exemption for withdrawing for house construction.

Explore other tax-efficient sources for funding home construction.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |9730 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 14, 2024

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I opened an NPS account in 2022 at the age of 68. Made investment of 50,000 each in the last two years to avail tax benefits. I no more require this tax benefit. Now I have completed 70 years. Can I withdraw the entire amount with accruals and close the account.
Ans: Congratulations on reaching 70! It's great that you opened an NPS account for tax benefits. Let's discuss your situation and withdrawal options:

1. NPS Withdrawal Rules:

Lock-in Period: NPS has a lock-in period until you turn 60 or retire from your regular job (whichever is earlier).

Partial Withdrawal: After 60, you can withdraw 60% as a lump sum and invest the remaining 40% in an annuity that provides regular income.

Full Withdrawal with Conditions: At 70, you can withdraw the entire accumulated corpus (your contributions and earnings) if it's less than Rs. 5 lakh.

2. Understanding Your Situation:

Full Withdrawal Possible: Since your total contribution is Rs. 1 lakh (2 years * Rs. 50,000) and you're 70, you can likely withdraw the entire amount with accrued interest.

Tax Implications: The entire withdrawn amount (including accrued interest) might be taxable as per your income tax slab.

3. Considering Alternatives (Optional):

Annuity for Regular Income: If you need regular income, consider using a portion of the corpus to purchase an annuity. This might provide a steady stream of income post-retirement.
Here's the key takeaway: You can likely withdraw the entire NPS corpus since it's less than Rs. 5 lakh. However, the withdrawal will be taxable. Consider consulting a tax advisor for specific tax implications.

Remember, financial planning is an ongoing process. Consulting a Certified Financial Planner (CFP) can help you make informed decisions about your retirement income and tax strategies.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |9730 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Mar 21, 2025

Asked by Anonymous - Mar 21, 2025Hindi
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Dear Sir, If I invest in NPS tier 2, do I need to pay tax for the entire amount or just for the interest? Do I need to pay interest every year or at the time of the withdrawal? Please help me how the tax would be calculated. Also suggest if I need to consider any other investment instead of NPS tier 2. Thanks and Regards, Srikanth
Ans: NPS Tier 2 is a flexible investment option. However, it does not have tax benefits like Tier 1. The tax treatment of your investment depends on when and how you withdraw.

Tax on Principal vs. Interest

You do not pay tax on the invested amount.
The entire withdrawal amount, including gains, is taxable as per your income tax slab.
Tax at the Time of Withdrawal

The withdrawal amount is added to your annual income.
You will be taxed as per your income tax slab in that financial year.
Taxation Frequency

There is no annual tax on the interest.
Tax is applicable only at the time of withdrawal.
Limitations of NPS Tier 2
No Tax Benefits

Unlike Tier 1, there are no deductions under Section 80C.
Market-Linked Returns with No Exit Benefits

NPS Tier 2 investments are linked to the market.
However, they do not get the same tax advantages as mutual funds.
Liquidity and Lock-in

There is no mandatory lock-in for regular investors.
For government employees, there is a 3-year lock-in.
Not an Ideal Wealth Creation Tool

Returns are uncertain.
Mutual funds provide better long-term tax efficiency.
Better Alternatives to NPS Tier 2
If your goal is wealth creation, consider these options:

Equity Mutual Funds
They offer long-term wealth growth.
Actively managed funds aim for better returns than passive funds.
Long-term capital gains (LTCG) above Rs. 1.25 lakh are taxed at 12.5%.
Short-term capital gains (STCG) are taxed at 20%.
Debt Mutual Funds
Suitable for stability with moderate returns.
Gains are taxed as per your income tax slab.
More flexible than NPS Tier 2.
Gold ETF
Good for diversification.
Easy to buy and sell.
Gains are taxed as per your income tax slab.
PPF (Public Provident Fund)
A safe, long-term option.
Completely tax-free returns.
Limited liquidity.
Final Insights
NPS Tier 2 does not provide tax benefits.
The entire withdrawal amount is taxable.
Mutual funds offer better tax efficiency and flexibility.
Equity funds can create wealth over 10-15 years.
Debt funds offer stability with better liquidity.
Consider gold ETF and PPF for diversification.
Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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