On the presentation of the 2021 Budget by Finance Minister Nirmala Sitharaman on 1 February 2021 active holders are expecting a tax gain even on the amount invested in the NPS Tier-II account. As we all are well-informed that under separate provisions of the Income Tax Act, 1961, NPS falls with tax exemptions. The cause for this tax gain is already known to government employees and can now be applied by the government to private employees. Taxpayers will have an added advantage to save tax and generate income by extending tax incentives to NPS Tier -II. Contributions must be made in the NPS Tier I account for non-government NPS subscribers, in addition, to take advantage of income deductions and avoid tax.
There are two accounts for NPS, Tier I and Tier II, the latter is the default account for initiating the NPS account into which the minimum contribution falls. That being said, Tier II is an alternative account for non-government employees, and as it has no lock-in duration, one can even access this as savings for creating wealth. The tax advantage of Section 80C for a deduction is capped at Rs 1.50 lakh against contribution towards NPS for government employees, given that there is a lock-in term of 3 years. Last year, with a short lock-in of 3 years, the government had already sought out a tax saving mechanism in NPS Tier II for government employees. The budget may also open it up to the regular investors, maybe with an opportunity for a better allocation of equity this year.
As the NPS is a retirement fund, the savings made in the National Pension System (NPS) is locked-in for the coming years. The Tier-I account is opened automatically after accessing NPS, in which one agrees to contribute at least a minimum amount per year until the age of 60. The subscriber can withdraw a balance of up to 60 per cent of the portfolio at the age of 60 whilst the payout is paid on the balance of 40 per cent under NPS. In comparison, NPS also has an alternative to park funds without any lock-in accessible to the NPS subscriber. This alternative is in the nature of an NPS Tier II account that allows one to make a withdrawal from his or her NPS corpus anytime. Tier-I account: Mandatory, Tier-II: Withdrawal with no tax deduction benefit as well as with a lock-in term of 3 years are currently extended to the central government employees under NPS. The employee is not granted an investment preference as long as the asset class allocation and selection of investment is involved.