BackCan I operate NPS Tier II account as savings account to earn higher interest?
The NPS tier II account can be operated like a saving account without a cheque book but you will have to pay transaction charges for each transaction.
PremiumCan I operate NPS Tier II account as a savings account sans cheque book facility to receive a higher rate of interest? Also, can I have ₹5,000 in the Tier 1 account of NPS as it is mandatory to open a Tier II account in NPS, and a big sum of ₹5,00,000 in his Tier 2 account without any restriction?
Would the treatment for income earned from Tier II account be different from Tier 1 account? Whether both tier I and Tier II accounts are EEE or EET from taxation point of view? Or, whether withdrawal from NPS Tier-II is Taxable?
-Ashok Bhatia
By Balwant Jain, investment and tax expert
The Tier I account under NPS generally has a lock in till 60 years of your age unless you extend it. However there is no lock in period for Tier II account which is optional for subscribers. Please note that the tax benefits is available in respect of contribution made by you towards Tier I account. Tax deduction is not available in respect of Tier II account unless you are a central government employee and have claimed deduction under Section 80C for contribution made towards Tier II account in which case the money so deposited will have a lock in of three years.
The NPS tier II account can be operated like a saving account without a cheque book but you will have to pay transaction charges for each transaction.
As regards the income tax, the rules are different for tier I and Tier II accounts. In respect of money accumulated in Tier I account, you have to mandatorily buy an annuity for 40% of the corpus accumulated in the Tier I account and the annuity will become taxable in the year in which it is received by you whereas the balance 60% which you are entitled to withdraw comes fully tax free in your hands.
There is no clear cut provision for taxation of money withdrawn from tier II account but in my opinion the same should be taxed like your debt mutual fund where the profits are taxed as long term with indexation, if held for more than 36 months and as short term in case redeemed within 36 months. Please note that it is the profits and not the entire withdrawal which is taxable.
(Views as expressed by the expert.)
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