Can’t fill Sec 80C limit? Use NPS Tier-ii tax saver

Only central government staff looking for debt-oriented schemes should go for it

The Pension Fund Regulatory and Development Authority (PFRDA) — India’s pension fund regulator — has released operational guidelines for the National Pension Scheme (NPS) Tier-ii Account Tax Saver Scheme, 2020.

Central government employees’ contribution to this account will be eligible for tax deduction under Section 80C of up to ~1.5 lakh per year, and face a lock-in of three years. Private sector employees’ contribution to an NPS tier-ii account will neither be eligible for tax deduction nor face a lock-in.

Three accounts will, henceforth, be available to central government employees. Gopal Bohra, partner at NA Shah Associates, says: “A central government employee could have three NPS accounts — tier-i, a mandatory account; tier-ii, an optional account from which they can withdraw freely; and the tax saver tier-ii, again an optional account that will offer Section 80C benefit and has a lock-in.”

The subscriber will have no control over the scheme’s asset allocation. Suresh Surana, founder of RSM India, says: “This is because it follows a mandatory and prescribed asset allocation.”

Asset allocation will be — up to 25 per cent in equities, up to 90 per cent in debt, and up to 5 per cent in cash, money market, and liquid funds.

Investors will get a primarily debt-oriented product. Tarun Birani, founder and CEO of TBNG Capital Advisors, says: “The asset allocation is debtheavy, making it almost a debt instrument. Investors should not have very high return expectations from it.”

Subscribers will have the option to choose up to three separate Pension Fund Managers (PFMS) to manage their money in this scheme. They must bear in mind the 3-year lock-in.

“No premature withdrawal of funds will be possible, except on death of the subscriber. In such a circumstance, the nominee or legal heir will be allowed to withdraw the corpus,” says Surana.

NPS tier-ii can find a place in your portfolio in certain circumstances. Bohra says: “If there is a shortfall in your Section 80C investment, you may use the NPS tier-ii scheme to make up for it. Suppose you are falling ~50,000 short of reaching the ~1.5 lakh limit. In that case, people tend to go for the five-year tax-saving fixed deposit (FD). In the tier-ii account, the lock-in is only 3 years (against five in the FD). And returns will be similar to that of the FD.”

If you close your NPS tier-i account and exit NPS, you will not be allowed to contribute further to the NPS tier-ii tax saver scheme. Closure of this account will be permitted only after completion of the lock-in period.

Besides NPS tier-ii, investors can also use a few other options to bridge the Section 80C gap. Birani says: “A mixed debtequity allocation to Public Provident Fund (PPF) and equity-linked saving schemes (ELSS, or tax-saver mutual funds) works well.”

Investors should take into account their age and asset allocation of their existing investments to decide whether to go for this debt-oriented scheme or not.