Substantially reducing the lock-in for availing section 80C tax benefit on NPS investment the government has brought it on par with one of the most popular tax-saving investments such as ELSS. However, this benefit is only for central government employees.
The Finance Ministry today announced that the contribution made by the central government employees under the Tier-II of the National Pension System (NPS) will now be eligible for deduction under section 80C of the Income Tax Act.
Earlier, this deduction was available only for investments in TIER-I account of NPS scheme. Post this announcement, the contribution made to Tier-II account will be eligible for Section 80C tax benefits at par with other pension-related government schemes such as General Provident Fund (GPF), Contributory Provident Fund (CPF), Employees Provident Fund (EPF) and Public Provident Fund (PPF).
However, this tax-benefit comes with a catch. The benefit of tax-saving via Tier II of NPS comes with a lock-in period of three years. Earlier, there was no lock-in period in Tier-II account as there was no tax benefit for the contributions made. However, going forward any contribution made by the government employees in the Tier-II account will be eligible for tax-savings under section 80C of the Income Tax Act along with the lock-in period of three years. The advantage here is that the tax saving investments in Tier II can be withdrawn after the mandatory lock-in of 3 years while those in Tier 1 can only file the retirement.
In addition to that tax exemption limit for lump sum withdrawal on exit has been enhanced to 60%. Till now, out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable.
The government has already announced that it has enhanced the mandatory contribution by the Central Government for its employees covered under NPS Tier-I from the existing 10% to 14%. However, the employee's minimum contribution to the scheme will remain the same at 10 percent. A notification implementing this increase is however yet to be issued.
NPS scheme offered by the government comes with two types of account – Tier -I and Tier -II. One can open Tier-II account only if he has opened Tier-I account. To invest in NPS scheme, it is mandatory to have a Tier-I account while it is optional to open Tier-II account.
The tax benefits earlier were available only to the subscribers of Tier-I account under the overall limit of Rs 1.5 lakh. Additionally, one can claim a deduction of Rs 50,000 if invested in NPS making total tax-savings of Rs. 2 lakh in the financial year.
