Gains from NPS Tier 2 accounts are taxable as per the slab rate!

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: October 11, 2025 at 12:41 pm

Last Updated on October 11, 2025 at 12:44 pm

In response to our article, NPS Multiple Scheme Framework – What you need to know, wherein we have written, “we still do not have any clarity on how Tier 2 funds are taxed! Readers point me to various articles discussing tier 2 taxation, but there is no official statement from the finance ministry on this, as far as I know”.

Ashal Jauhari, admin of the Facebook group Asan Ideas for Wealth, pointed out to me the FAQ document from NPS Trust on the NPS All Citizen Model says the following (last page)

Tier-II account:
i. No tax benefits are available on contributions made in an NPS Tier-II account.
ii. No tax rebates/special treatment for the gains arising out of investment in NPS Tier-II. The assessee shall be liable for taxation as per the marginal tax rate applicable to him/her.

While there is no official document from the finance ministry on this, it is as official as it gets. Even otherwise, several knowledgeable CAs pointed out that if there is no specific taxation rule, the income/gain should be treated as “income from other sources” and taxed as per the slab. This is still valid.

Several NPS fans devised all sorts of innovative uses for the Tier 2 account. Would you still invest in the Tier 2 account (we now have “100%” equity options in the NPS Multiple Scheme Framework) and be happy to pay tax as per the slab?

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We reiterate our recommendations.

  • NPS is not needed for retirement.
  • If your employer offers to contribute 14% to it, you can opt for it, but (1) if you are a job-hopper, then your portfolio would be a mess if future employers do not contribute, (2) there is no “extra” tax saving! The 14% contribution will simply be added to total income and removed as a deduction!
  • If you are already an NPS subscriber because you were enticed by the “extra 50K” tax saving, which is now defunct in the new tax regime, if the corpus is not more than Rs. 5 Lakhs, pull it out. Or keep the account alive by investing the minimum amount (Rs. 1000 each FY).
  • If you have not invested in the NPS so far, reward yourself and stay away.