What happens when you stop contributing to NPS

I used to subscribe to NPS tier 1 & 2

accounts on an annual basis for tax savings purposes. Can I discontinue depositing

to the NPS account, since I opted for the New Tax Regime now?

- T Yashvanth Reddy, Shamirpet

The Budget 2020 introduced income tax regimes, and from FY 2020-21, taxpayers can choose between two income tax regimes; the existing/old tax regime and the new tax regime. From FY 2021-22, taxpayers can choose either the old tax regime and avail of some tax exemptions and deductions or opt for the new tax regime. Taxpayers who opted for the old tax regime can continue availing of all the tax exemptions like house rent allowance, LTA and deductions under sections 80C, 80D, 80E etc, of the Income-tax Act, 1961. If a taxpayer opts for the old income tax regime, the last date for doing tax savings for a current financial year is 31 March 2023. The end of March is the end of tax saving season as well. Taxpayers who opt for the new tax regime that comes with concessional income tax rates must forgo most tax exemptions and deductions.

However, even if one opts for the new tax regime, it is vital to ensure one has deposited the minimum required contribution in Public Provident Fund (PPF), National Pension System (NPS) and Sukanya Samriddhi Yojana (SSY) to keep the account active. Many tax-saving schemes, including the PPF, NPS, and SSY, require the account holder to make a minimum deposit every financial year to ensure that the account remains active.

Individuals, taxpayers and assessees who have opened PPF, NPS and SSY, must continue contributing to these accounts before 31 March 2023. One must contribute or deposit the prerequisite or prescribed statutory minimum deposit into these accounts irrespective of the tax regime. One must deposit the minimum contributions in PPF, NPS and SSY, and it will be ideal to do the needful at the beginning of every financial year rather than waiting for 31 March of the year. Failing to deposit the minimum amount in a financial year would lead to the deactivation of their PPF, NPS and SSY account. Though one can reactivate their inactive or dormant accounts of PPF, NPS and SSY, it would incur a penalty. Hence, it is advisable to check whether the individual has deposited a minimum annual amount in one's PPF, NPS and SSY account.

As per the PPF rules, the account holder must deposit a minimum of Rs 500 in a financial year to keep their public provident fund account in active mode. Failing to deposit the minimum annual deposit amount of Rs 500 leads to the dormancy of the PPF account. The account holder has to pay Rs 50 as a penalty for each year of minimum deposit default in order to re-active the PPF account. This is crucial for especially the PPF account holders in their 14th or 15th year. Dormant PPF accounts cannot be extended beyond 15 years, or renew the inactive PPF account for another five years.

As per the NPS rules, the tier-1 NPS account holders are required to deposit Rs 1,000 in a financial year. Failing to deposit a minimum of Rs 1,000 in a tier-1 NPS account makes the NPS account inactive. The account holder will be able to reactivate the NPS account after depositing the minimum deposit of Rs 1,000 and a penalty of Rs 100 for each year of minimum deposit default. There is no minimum deposit in every financial year in the tier-2 NPS account. But the minimum amount per contribution is Rs 250 and there is no minimum balance required.

To answer your question, there is no minimum balance contribution requirement or minimum annual contribution for an NPS tier-2 account.

As per the SSY account rules, the account holders must deposit at least Rs 250 in a financial year. Failing to deposit the minimum annual deposit amount of Rs 250 leads to the dormancy of the SSY account. The account holders will have to pay Rs 50 penalty for each financial year or minimum deposit default year, along with the minimum annual deposit of Rs 250 to activate the SSB account. In case of SS Y account, the parents must be cautious and reactivate the inactive account before the girl child, in whose name the SSB account is opened, attains 15 years.

Do not abandon your life and health insurance policies. One must have taken life insurance or a health insurance policy to save tax due to mis-selling. The policyholders must continue paying the premiums, especially for the term and health insurance. The insurance policies will lapse after a premium payment is missed post the grace period.

So, irrespective of the tax regimes, you must invest the minimum deposit in tax-saving schemes and continue paying premiums for insurance policies to keep them active.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV)