If a Government employee contributes towards Tier-II of NPS, the tax benefit of Section 80C for deduction up to Rs. 1.50 lakh will be available to them provided that there is a lock-in period of 3 years.
The operational guidelines for the National Pension Scheme Tier II- Tax Saver Scheme, 2020, have been released by the PFRDA. As per the circular, any Central government employee contributing towards NPS is eligible for the scheme. Earlier in July 2020, the government had notified the NPS Tier-II tax saving scheme for the Central government employees who are eligible for it.
If a government employee contributes towards Tier-II of NPS, the tax benefit of Section 80C for deduction up to Rs 1.50 lakh will be available to them, provided that there is a lock-in period of 3 years.
The central government employee contributing towards NPS can now have three accounts to operate:
- Tier-I: Mandatory account
- Tier-II: Freely withdrawal with no tax benefit
- Tier-II: Tax benefit with a lock-in period of 3 years
As far as the investment choice and pattern of allocation is concerned, no investment choice will be provided to the employee. The asset class allocation will be as follows:
- Equity: 10 to 25 per cent ( As applicable to E-II)
- Debt: Up to 90 per cent ( As applicable to G-II and C-II)
- Cash/Money Market/Liquid funds: Up to 5 per cent
Subscriber or the employee is free to choose any pension fund but will be allowed to have a maximum of 3 pension funds separately for National Pension Scheme Tier II- Tax Saver Scheme, 2020. The PF change will be allowed after the lock-in period ends. Such reinvestment will be treated as fresh investments and will be again locked-in for 3 years.
For non-government NPS subscribers, the investments have to be made into the NPS Tier I account in order to avail deduction from income and save tax. NPS has two accounts – Tier I, and Tier II account – while the former is the default account that one has on opening NPS account into which the initial contribution goes into. The Tier II is, however, an optional account for non-government subscribers and one can additionally open it to park savings in it as it has no lock-in period.
The contribution made in the National Pension System (NPS) qualifies for tax benefits under the Income Tax Act, 1961. On the amount invested in NPS, one can avail tax breaks under Section 80CCD (1), Section 80CCD(1B) and Section 80CCD (2) of the I-T Act. Importantly, as per Section 80CCE, the aggregate amount of deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1. 5 lakh in a financial year.