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

by Emma

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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, but subscribers are looking forward to a tax benefit even on the amount deposited in the Tier-II account of NPS.

The reason being such tax benefit is already available to government employees and the government may extend it to the non-government employees as well.

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 for the long term as NPS is a retirement-focused scheme. On joining NPS, the Tier- I account gets opened automatically in which one has 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 per cent of the corpus while pension is paid on the balance 40 per cent. In addition, NPS has an option available to the NPS subscriber to deposit funds without any lock-in as well. This option is in the form of NPS Tier – II account which allows one to make withdrawal 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 pattern of allocation is concerned, no investment choice is provided to the employee. The asset class allocation is as follows:

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

By extending tax benefit 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 in order to avail deduction from income and save tax. NPS has two accounts – Tier I, and Tier II account – while the former is the default account that one has on opening NPS account into which the initial contribution goes into. The 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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