How to calculate capital gains on NPS Tier II withdrawals

I would like to know how I can determine the capital gains after withdrawing money from my NPS Tier II account. I cannot find any option on the eNPS portal to view or download a capital gains statement. My pension fund manager is HDFC Bank. How will the capital gains from an NPS Tier II withdrawal be taxed?

—Name withheld on request

The Income-tax Act does not contain specific provisions governing the taxation of withdrawals from an NPS Tier II account. As a result, the tax treatment has to be determined based on general principles of taxation, and differing views exist on the issue.

Under the Pension Fund Regulatory and Development Authority (PFRDA) framework, subscribers choose an asset allocation when opening an NPS account. Investments are made in units whose net asset value (NAV) changes over time. One view is that a withdrawal amounts to redemption of these units, with any resulting gain or loss taxable under the head “Capital Gains.”

Since Tier II investments are typically diversified across equity, corporate bonds and government securities, and do not attract securities transaction tax (STT), they may not qualify as equity-oriented investments for tax purposes. Accordingly, a holding period of 24 months may be applied to determine whether the gains are short-term or long-term.

eNPS Portal

At present, the eNPS portal does not provide a separate capital gains statement. It generally offers transaction and contribution statements, scheme-wise unit holdings, NAV details, and withdrawal or redemption details. As a result, capital gains may need to be computed manually on a unit-wise basis, potentially using the first-in, first-out (FIFO) method, depending on the timing and nature of contributions and withdrawals. For assistance, you may wish to contact your pension fund manager.
It should also be noted that the taxation rules apply irrespective of the pension management company.

There is also an alternative view that the gains may be taxable as ordinary income under the head “Income from Other Sources.” Under this interpretation, only the accretion—the difference between the redemption value and the amount invested—would be taxable. However, there are no explicit provisions in the Income-tax Act supporting this treatment either.

If you have any personal finance query, write to us at mintmoney@livemint.com to get it answered by experts.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.