Nooks and corners of the NPS

A couple of weeks ago, in a column on mutual fund taxation, I mentioned that NPS Tier 2 could be treated like a low-cost mutual fund. What I wrote was not accurate. While you can make investments and redemptions from tier 2 funds just like mutual funds, they are not taxed like mutual funds. Tier 2 has no specific mention in the tax code; therefore, by default, they fall under the general category of 'income from other sources'. This is added to your income in the year it is realised and, therefore, taxed at your marginal rate. Thus, they do not have the tax advantages that mutual funds have. Of course, this is not as bad as interest income, which is taxed as you receive it. In Tier 2, the money accumulates as long as you do not redeem it; thus, it plays a role in compounding the gains. Suggested read: Does NPS make sense as a tax-saving investment? There's