Tax Exemption On NPS Tier-2 Account Of Central Government Employees.

Central employees have got another option of tax saving. The Finance Ministry has also decided to exempt tax on Tier-2 accounts of National Pension System (NPS). Along with the changes in the income tax rules, the Finance Ministry has also issued notification of new rules. According to the notification, such central employees who deposit money in Tier-2 account of NPS. They can claim tax rebate of Rs 1.50 lakh annually under Section 80C of the Income Tax Act. However, the condition is that the lock-in period of three years will now also be applicable on this account.

That is, no withdrawals can be made from the account during this period. Tier-2 account is still like a normal savings account, from which the account holder can withdraw funds whenever he wants. Private sector employees will not get any benefit of this facility at present. The lock-in period will not be applicable to their accounts nor will there be any tax rebate. The new rules have come into force with immediate effect.

Tax to be paid on return
Investment in Tier-2 account will get the benefit of tax exemption, but the return on it will fall in the income tax category. The tax will be calculated under the investor’s tax slab. An official associated with the case said that now the central employees will get the freedom to invest the maximum amount of their funds at the desired location. This amount can be given to individual fund managers. There will be 80% investment in debt funds and 20% in equity. The employee can continue or close the account after the lock-in period of three years.

These conditions also include
If the central employees deposit Rs 1,000 in the first year and 250 rupees for the next two years in a Tier-2 account, then this account cannot be transferred to someone else.

Tier-2 account will not open without Tier-1
Actually, NPS offers the convenience of opening two types of accounts. In this, Tier-1 account is for pension facility, in which there are many restrictions on withdrawal of deposited amount. This account gets tax rebate on both deposits and withdrawals. Second, there is a Tier-2 account which still functions like a normal savings account. Investors can withdraw the deposits in it whenever they want. To open a Tier-2 account, it is necessary to be a Tier-1 account holder.