Tax Deduction for Government Subscribers to Tier-2 NPS Accounts

The government recently notified Tier-2 NPS accounts as a tax-saving tool for central government employees. Central Government employees making investments in Tier-2 accounts should keep them locked-in for three years. The condition for opening a Tier-2 account is that the subscriber should already have a Tier-1 NPS account. 

Tier-2 NPS account is otherwise available for voluntary investments to any investor. Individuals having a Tier-1 account can open a Tier-2 for investment. The funds can be withdrawn any time from a Tier-2 account, unlike a Tier-1 account. Also, a Tier-1 account should be held until retirement, thus helping build retirement savings. 

Investment in Tier-1 accounts continues as earlier with the benefit of tax deductions for contributions to NPS. Further, the investment in Tier-2 will also be part of the deductions under section 80C within an upper limit of Rs 1.5 lakh. The inclusion of Tier-2 account benefits Central Government employees seeking short-term liquidity with tax benefits. 

Also Read: Banks offer special FD scheme for the benefit of senior citizens

For a regular investor in Tier-2, the withdrawals are taxable. However, now upon notifying Tier-2 for tax savings, the income tax department may need to issue a clarification on the taxation of the amount withdrawn after the three-year lock-in. The Tier-1 account enjoys a tax-exemption for 60% of the amount withdrawn upon retirement. The NPS scheme requires that you use the balance 40% to buy an annuity.

National Pension Scheme (NPS) offers a choice of investment with a mix of equity, debt securities and government securities. You can choose the type of scheme in which you want to invest. In the NPS scheme chosen, you can allocate a maximum of 50% of your investment to equities. Both Tier-1 and Tier-2 account are functionally similar. Both the Tier-1 and Tier-2 accounts offer a choice of fund managers and an option to change the fund manager if required. 

The inclusion of Tier-2 as a tax savings tool for Central Government employees can help in generating investor interest in the scheme. 

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in

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