Is withdrawal from NPS Tier II equity fund taxable as long-term capital gains (LTCG) at 12.5 per cent when held for more than one year or as income from other sources at slab rates?

Murli Krishnamurthy

Under the Income‑tax Act, 2025, units held in an NPS Tier II constitute capital assets, and gains arising on withdrawal are chargeable to tax under the head “Capital Gains”. Depending on the holding period, this could be regarded as long term or short term. For withdrawals made on or after July 23, 2024, NPS Tier II units qualify as long‑term capital assets only after a 24‑month holding period. Gains on such long‑term holdings are taxable at 12.5 per cent without indexation. On the other hand, if units are redeemed before completing 24 months, the gains are treated as short‑term capital gains and taxed at the applicable income‑tax slab rate.

Although NPS Tier II account may be fully invested in equities, units issued under the NPS are not treated as equity mutual fund units for tax purposes. Hence, while classified as capital assets, NPS Tier II (equity scheme) units do not qualify for exemption such as shorter holding period for determining long term or short term — 12 months and ₹1.25 lakh exemption threshold limit, which are applicable to equity shares or equity mutual fund units.

Accordingly, withdrawal from NPS Tier II equity fund is taxable as short-term capital gains if the units are held for more than one year but less than 24 months and as LTCG if held for over 24 months.

The writer is Partner, Deloitte India

Published on May 23, 2026