Tax benefits on NPS Tier II accounts bring it at par with ELSS for govt employees

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Published: July 13, 2020 4:50 PM

Recently, the government has decided to provide its employees 80C benefits on contributions made to Tier II accounts, provided such contributions are made for at least three years.

National Pension System, NPS, NPS Tier II Account, mutual fund, MF, equity linked saving scheme, ELSS, tax benefits, 80C tax benefits, voluntary contribution to NPS, 80CCD(1B), equity, debt, government securitiesTier II Accounts also provide the subscribers the benefits of NPS investments.

Unlike Tier I account, which is used to accumulate retirement corpus and get pension, the Tier II Account of National Pension System (NPS) functions like a bank account in which a subscriber may put money any time and withdraw whenever he/she wants. However, Tier II Accounts also provide the subscribers the benefits of NPS investments, which would be superior than the rate of interest on savings bank accounts.

While compulsory contributions to Tier I accounts provide tax benefits u/s 80C of the Income Tax Act and voluntary contributions to the accounts provide benefits u/s 80CCD(1B), there were no tax benefits so far on contributions made to Tier II Accounts of NPS.

Recently, the government has decided to provide its employees 80C benefits on contributions made to Tier II accounts, provided such contributions are made for at least three years.

“Bringing the tax benefit aspect in NPS Tier II accounts is indeed a good initiative. We all know that tax benefits are the main driving force while making investment decisions and this will surely help in increasing the penetration of Tier II accounts in days to come. Although this scheme is applicable only for the Government sector Subscribers, it is important to note that at present, they form the largest Subscriber base in NPS,” said Amit Sinha, Executive Vice President, NSDL e-Governance.

“With the announcement of Tax benefits on Tier II accounts, NPS Tier II is now a part of the tax saving options under 80C spectrum and is one of those options with the lowest lock-in period i.e., the element of liquidity still continues. After the 3-year lock-in to gain tax benefits, the Subscriber will be able to enjoy liquidity on investments in Tier II. So, Tax benefit coupled with the basic benefit of Tier II i.e., element of liquidity, now makes Tier II an excellent investment option,” he added.

With the NPS already considered as a substitute of mutual fund (MF) due to its capability to generate higher returns through capital investments, the 80C benefit for central government employees on contributions made for 3 years to Tier II accounts made it comparable to Equity Linked Savings Schemes (ELSS), which predominantly invests in equities and also have lock-in period of 3 years and tax benefits u/s 80C.

“Now, similarities can be drawn to popular ELSS schemes with advantages of tax benefit and liquidity, but Tier II is a much easier option to invest and it is almost a zero maintenance cost product. It can also be seen as a GPF account of Government employees where withdrawals are allowed for short term needs with applicable tax benefits. Through this announcement, we expect that Tier II will attract more penetration,” Sinha said.

While ELSS is an equity-oriented instrument, NPS provides wider choice of equity, debt and government securities and also provides the subscribers option to change the investment choice once or twice a year.

“Investing and operating NPS Tier II is very simple. To open a Tier II account, only prerequisite is that the Subscribers should have an active Tier I account. Activation of Tier II accounts can be done online by visiting NSDL’s eNPS website or the subscribers can approach their associated offices or any Point of Presence (called as POP) appointed by PFRDA,” Sinha said.

“As NPS Tier II is a voluntary account, Subscribers can invest as per their convenience. There are neither maintenance charges nor exit load on withdrawal. In addition to these benefits, Subscribers have the complete flexibility to decide their own investment choice and that can also be changed once/twice a year,” he added.

“To conclude, with this newly announced tax benefit, I would say that an NPS Tier II account is a win-win situation for NPS Government Subscribers,” Sinha further said.

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