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Nps tier-2 taxation

rajesh sharma (retired) (55 Points)

16 May 2025

Does 1 way transfer from nps tier-2 to nps tier-1 have any tax implication? Specifically, does any gain from tier-2 withdrawal attract tax?

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Rama chary Rachakonda (Master in Accounts & high court Advocate email ID:ramachary64@gmail.com voice no:9989324294) (8176 Points)
Replied 16 May 2025

Transferring funds from NPS Tier-2 to NPS Tier-1 has specific tax implications: -

*Tax Benefits on Contributions*: NPS Tier-1 contributions are eligible for tax deductions up to ₹1.5 lakh under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B).

However, Tier-2 contributions do not offer tax benefits for private-sector employees, while government employees can claim deductions under Section 80C. -

*Taxation on Gains*: Gains from NPS Tier-2 are subject to capital gains tax, which might make it more tax-efficient compared to other investment options like fixed deposits.¹ -

*Withdrawal Tax Implications*: NPS Tier-1 has withdrawal restrictions, with 40% of the corpus required to be invested in annuity at exit. Premature withdrawals are allowed, but 80% of the corpus must be used to purchase an annuity. Tier-2, on the other hand, has no such restrictions, and withdrawals are tax-free.

*Key Considerations*: -

*Tax Efficiency*: NPS Tier-2 might be more tax-efficient due to capital gains tax applicability, but Tier-1 offers more substantial tax benefits on contributions. -

*Withdrawal Flexibility*: Tier-2 offers more flexibility in terms of withdrawals, with no tax implications on withdrawals. -

*Retirement Corpus*: Tier-1 is designed for long-term retirement corpus building, with tax benefits and investment options tailored for this purpose.

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rajesh sharma (retired) (55 Points)
Replied 16 May 2025

Thanks sh. Rama chary for precise reply. It removed all my doubts.

Tiea Mehta (2 Points)
Replied 23 May 2025

Yes, gains from NPS Tier-2 are taxable, even if you're transferring to Tier-1. Tier-2 is treated like a normal investment, so capital gains tax applies on withdrawal. If you want further and detailed explanation then reach out to this site or page called 'retire100' they have got these amazing guides for every type of investment and you can also get their expert advice on nps. You just have to search "retire100' and you will be redirected.