NPS Tier-II investments: The central government launched the NPS Tier-2 variant (NPS-TTS) for its employees in September 2020. The lock-in period in this is 3 years. This benefit can be availed only by those Central Government employees who have an active NPS Tier 1 account.
Apart from tax-savings, there is another option for central government employees to save tax in instruments covered under Section 80C. This is National Pension System (NPS) Tier-2 (Investment) account. The central government launched the NPS Tier-2 variant (NPS-TTS) in September 2020. The lock-in period in this is 3 years. This is only for such Central Government employees who have active NPS Tier-1 (Primary, Retirement) account. Central government employees can invest in this scheme and avail tax deduction of up to Rs 1.5 lakh under section 80C.
There must be an active Tier 1 account to invest in Tier 2 account
Central government employees have not shown much interest in this scheme. But, this is an option which they can use for tax-savings before March 31. Apart from Central Government employees, other people can also open this account to take advantage of the low charge structure of NPS. The condition is that they should have an NPS Tier-1 account.
Option to invest in equity and debt
Like mutual funds, investments can be made in debt (corporate debt and government securities), equity and alternative asset schemes through Tier 1 and Tier 2 accounts. NPS Tier 2 has the flexibility to withdraw money unlike Tier 1. In Tier 1, the money is locked till the age of the account holder is 60 years. In Tier-1, 60 percent of the money deposited is allowed to be withdrawn, which is not taxed. The remaining money has to be used to buy annuity for pension income. Partial withdrawal is allowed for some special purposes. These include buying a house, treatment of serious illness and children’s education.
How are Tier 2 account gains taxed?
The tax rules on withdrawal of money from Tier-1 retirement account are clear. Tier-2 also allows you to choose your pension fund manager and invest across its schemes – equity, corporate debt, government securities and alternate assets. However, if you are not a government employee who has chosen this account as a tax-saving option with a lock-in of three years, you are allowed to withdraw the money as and when required.
As of now, it is not clear how gains in NPS Tier 2 account will be taxed at the time of redemption. Some experts say that considering the flexibility of withdrawal of money, it seems that the gains will be considered as income from other sources of the taxpayer and will be taxed as per the taxpayer’s slab.
However, some experts have different opinions regarding this. Chetan Chandak, director of tax consultancy firm TaxBirable, said, “In this regard, the Income Tax Department and PFRDA should issue guidelines to clarify the situation. So at the moment it depends on what the rule is interpreted to be.”
If you are a central government employee and want to invest in NPS Tier-2 for tax-savings, then you will have to keep the tax issue in mind.
