Budget 2021 Expectations: Will tax saving option in NPS Tier II account be extended to all taxpayers?

by Joseph K. Clark

Budget 2021 India: The government has already tried out a tax saving option in NPS Tier II for government employees last year with a shorter lock-in of 3 years.

Union Budget 2021 Expectations: Subscribers of the National Pension System (NPS) are looking forward to the Budget 2021 announcements by Finance Minister Nirmala Sitharaman on February 1, 2021.

Currently, NPS comes with tax benefits under various sections of the Income Tax Act, 1961. Still, subscribers are looking forward to a tax benefit even on the amount deposited in the Tier-II account of NPS.

The reason is that such tax benefit is already available to government employees, and the government may extend it to non-government employees.

Budget

If a government employee contributes towards Tier-II of NPS, the tax benefit of Section 80C for deduction up to Rs 1.50 lakh will be available to them, provided there is a lock-in period of 3 years. “The government has already tried out a tax saving option in NPS Tier II for government employees last year with a shorter lock-in of 3 years. The government may open it up for the general public also, maybe with an option for a higher equity allocation,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.

The money invested in the National Pension System (NPS) is locked in long-term as NPS is a retirement-focused scheme. On joining NPS, the Tier- I account gets opened automatically, in which one has to keep depositing at least a minimum amount each year till age 60. On retirement, at age 60, the NPS subscriber may withdraw an amount of up to 60 percent of the corpus while pension is paid on a balance of 40 percent. In addition, NPS has an option available to the NPS subscriber to deposit funds without any lock-in. This option is in the form of an NPS Tier – II account, which allows one to withdraw anytime without lock-in.

The central government employee contributing to NPS can have three accounts to operate:

1. Tier-I: Mandatory account
2. Tier-II: Freely withdrawal with no tax benefit
3. Tier-II: Tax benefit with a lock-in period of 3 years

As far as the investment choice and allocation pattern are concerned, no investment choice is provided to the employee. The asset class allocation is as follows:

  • Equity: 10 to 25 percent
  • Debt: Up to 90 percent
  • Cash/Money Market/Liquid funds: Up to 5 percent

By extending tax benefits to NPS Tier -II, taxpayers will get an additional option to save tax and grow money. For non-government NPS subscribers, the investments have to be made into the NPS Tier I account to deduct income and save tax. NPS has two accounts – Tier I and Tier II account – while the former is the default account on opening an NPS account into which the initial contribution goes. Tier II is, however, an optional account for non-government subscribers, and one can additionally open it to park savings in it as it has no lock-in period.

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