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Apart from tax-savings, there is another option for central government employees to save tax in instruments covered under Section 80C. This is a 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 is 3 years. This is only for such Central Government employees who have an 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.
Must have 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 they can use for tax-savings before March 31. Apart from central government employees, others can also open this account to avail the low fee 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 facility to withdraw money unlike Tier 1. In Tier 1, the money remains locked until the account holder turns 60 years of age. In Tier-1, 60 percent of the money deposited is allowed to be withdrawn, on which there is no tax. The remaining money should be used to buy annuities for pension income. Partial withdrawals are permitted for certain specified 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 in its schemes – equities, corporate debt, government securities and alternative 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 the gains in NPS Tier 2 account will be taxed at the time of redemption. Some experts say that given the flexibility of withdrawing money, it seems that the profit will be treated as the taxpayer's income from other sources 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 Taxbearable, said, “In this regard, the Income Tax Department and PFRDA should issue guidelines to clarify the situation. So at the moment it depends on how the rule is interpreted.”
If you are a central government employee and want to invest in NPS Tier-2 for tax savings, then you have to keep the tax issues in mind.