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

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However, when withdrawn, it is added to your total income and taxed as per your slab.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The withdrawn amount is still subject to final tax calculation based on your total income.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