The National Pension System Tier-II Tax Saver Scheme (NPS – TTS), which was introduced three years ago for central government employees, is yet to gain subscribers' attention.
The Assets Under Management (AUM) for this scheme stood at just Rs 12.5 crore as of March 2023, according to data provided by the Handbook of NPS 2023.
NPS offer two types of accounts: Tier - I and II. Tier I is a mandatory retirement account, whereas Tier II is a voluntary saving account. The Tier-I account of NPS is a contribution account to build a retirement corpus, from which one can get an annuity after 60 years of age. Contributions to a Tier-I account are eligible for deduction under Sec 80C. The Tier-II account is an investment account where any surpluses or money required in the short term can be parked and withdrawn at will. “There is no tax advantage for the money parked in a Tier II account,” says Suresh Sadagopan, founder, Ladder 7 Financial Services.
The Pension Fund Regulatory and Development Authority (PFRDA) and the government have been proactive in setting up NPS is one of the best retirement cum investment products for the Indian citizens.
In September 2020, the government introduced another variant of account NPS–TTS, which is available only for central government employees having an active Tier I account. Any central government subscriber can invest in a Tier-II tax saver scheme and avail tax benefits on investments up to Rs 1.5 lakh under section 80C.
A short lock-in period
NPS-TTS has a lock-in period of three years. “Each fresh investment is calculated separately for three years lock-in period. Calculation of lock-in period will be based on the date of investment in scheme,” says Sumit Shukla, MD & CEO - Axis Pension Fund.
NPS–TTS is one of the few investment products in the 80C basket with a shorter lock-in period of three years. While the other instruments in the basket such as National Savings Certificate (NSC), tax-saving bank fixed deposit and Public Provident Fund (PPF) have much longer lock-in periods between 5 and 15 years. But it matches with the Equity-Linked Savings Scheme (ELSS) which also has a lock-in period of three years.
Also read: NPS Equity funds shine, but struggles to beat broader indices
However, the 80C tax benefit may not be a big deal for many investors, as it is easier to meet the required quantity of Rs 1.5 lakh in a financial year with so many other eligible instruments in the crowded 80C bucket.
A fixed-income heavy fund option
However, its fixed-income heavy fund option makes NPS–TTS unattractive. While the regular Tier-I and Tier-II accounts allow investors to choose between active or auto investment options, NPS-TTS comes up with a single investment option that invests 10-25 percent in equity and the rest in debt instruments. “It is particularly suitable for conservative investors and maintains a debt-oriented investment strategy, with a modest allocation of 10-25 percent in equity,” says Nehal Mota, Co-Founder & CEO, Finnovate, a hybrid financial fitness platform.
ELSS schemes score over NPS–TTS due to equity-heavy portfolios that can generate a higher return over the long run.
Currently, all 10 pension fund managers offer the NPS-TTS option to central government employees. Among them, HDFC Pension, SBI Pension and LIC Pension have managed the largest corpus of Rs 4 crore, Rs 3.7 crore and Rs 1.4 crore, respectively.
Also see: 70% of NPS annuity subscribers choose single life policy to pass on principal to nominee: PFRDA
In NPS, unlike the all-citizen model, the investment choice with higher equity allocation is not available for central government employees. In Tier–I account too, the central government employees are currently offered only four fund options viz, default fund option (which invests up to 15 percent in equity), Scheme G (nil equity exposure), Scheme LC 50 (up to 50 percent in equity) and Scheme LC 25 (up to 25 percent in equity).
Ambiguity in tax implication
One of the other reasons for the low investor participation is ambiguity in the tax implication on the withdrawal amount from the NPS-TTS account. In the case of the Tier-I retirement account, the tax rules on withdrawal are clear. Since there is no formal notification from the government on how NPS Tier-II gains will be taxed on redemption, tax experts are divided on how the gains are taxed.
Shukla of Axis Pension Fund says on redemption of NPS-TTS, indexation benefits may apply on the capital gain.
Abhishek Soni, CEO & Co founder of Tax2win, a Fisdom company, says, “The NPS Tier-II account withdrawal is considered part of the subscriber's total taxable income. The tax liability on the withdrawal amount depends on the subscriber's income-tax slab rates. The withdrawal is added to the subscriber's total income and taxed at the applicable income-tax slab rates."
No withdrawal is allowed in NPS-TTS during the lock-in period of 3-years. However, in the case of the death of the subscriber, the corpus can be withdrawn by the nominee or legal heir.
Also read: NPS assets at Rs 9 lakh cr, subscriber base at 6.3 cr as of March 2023: PFRDA
The NPS has become one of the preferred retirement options in India, thanks to its defined contribution pension structure, low cost, transparency, hassle-free operation, better-performing fund options and tax advantages. The NPS was first introduced for central government employees who joined the service on or after January 1, 2004. Thereafter, state governments followed suit and then it was extended to all citizens from May 1, 2009. The total number of subscribers in NPS (excluding Atal Pension Yojana) grew significantly to 1.73 crore as of March 2023.
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