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 The funds can be withdrawn any time from a Tier-2 account, unlike a Tier-1 account.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Tier-2 for tax savings, the income tax department may need to issue a clarification on the taxation of the amount withdrawn after the three-year lock-in. The Tier-1 account enjoys a tax-exemption for 60% of the amount withdrawn upon retirement.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
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.
The systematic investment plan (SIP) contribution in February 2024 has crossed a new milestone. The monthly contribution tipped at Rs…
The Income-Tax (I-T) Department has directed taxpayers to access the Annual Information Statement (AIS) via the e-filing official portal and…
Considering the vagaries of the stock market, investors often ponder over reevaluating their strategies. Whether to continue to remain invested…
Financial planning is beyond just investing wisely to save on taxes; it's also related to protecting oneself and one's loved…
A salaried individual earning up to Rs 5-15 lakh as net salary on an annual basis must first take stock…
Equity-linked savings schemes (ELSS), also referred to as tax-saving schemes, are equity funds that invest a significant portion of their…