After the recent government notification, investment in Tier II account of National Pension System (NPS) will become eligible for tax deduction under Section 80C. It is to be noted that this is only for the central government subscriber. To be eligible for income tax benefits, contributions by the central government employees in Tier II account of NPS will be locked in for three years.
To open Tier II NPS account, the only pre-requisite is that the subscribers should have an active Tier I account. Activation of Tier II account can be done online or the subscribers can approach their associated offices or any Point of Presence (called as POP). "The minimum amount of contribution to activate the specified account shall be ₹1,000 and and minimum amount of subsequent contribution shall be ₹250," says the notification.
"There is neither maintenance charges nor exit load on withdrawal. In addition to these benefits, Subscribers have the complete flexibility to decide their own investment choice and that can also be changed once/twice a year," says Amit Sinha, Executive Vice President, NSDL e-Governance. NSDL e-Governance is the Central Record Keeping agency for National Pension System.
Private sector employee contributions to the NPS tier-II account will not get tax deductions under Section 80C but will continue to remain free from lock-in.
The maximum tax deduction under Section 80C is ₹1.5 lakh per annum, including on products like life insurance premium, PPF, equity-linked savings scheme (ELSS) funds or investments into NPS tier-I. But if a tax payer opts for the new income tax rates, Section 80C benefits cannot be availed.
Here are tax benefits applicable on NPS Tier I account, applicable to both govt sector and private sector employees:
1) Contribution towards NPS tier 1 account allows you to claim an exclusive deduction of ₹50,000 under Section 80CCD (1B). You can continue to claim this benefit if you stick to the old income tax regime. But this cannot be claimed if you switch to the new tax regime.
2) This is in addition to the ₹ 1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. Also note that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year. If you opt for the new income tax regime, you cannot claim this benefit. But it will continue under the old regime.
3) Under the new tax rates that came into effect from April 1, there is zero tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.
4) If you opt for the new tax rates, you can still claim income tax deduction on employer contribution towards employee’s NPS account. If your employer is contributing towards your NPS account, a deduction of up to 10% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). Central government employees enjoy a higher limit of 14% of the salary. For others, the limit is 10%. This benefit is also available if you stick to the old income tax regime.
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