NPS income tax benefits: Latest rules for private, govt employees explained

The pension regulator Pension Fund Regulatory and Development Authority or PFRDA has come out with guidelines on the National Pension System (NPS) tier-II income tax saving scheme, under Section 80C. Only central government employees are eligible for income tax benefits under NPS Tier II scheme. This is in addition to the income tax benefits available under the Tier I NPS scheme.

NPS Tier II account tax benefits - only for central govt employees

The central government employee's contribution towards Tier-II account of NPS for availing income tax deduction (up to ₹1.5 lakh) per year will have a lock-in period of 3 years.

No withdrawal will be allowed during the lock-in period of three years. However, in case death of the subscriber, the corpus can be withdrawn by the nominee/legal heir.

The central government employee who wants to avail this tax benefit can have three NPS accounts: Tier-I ( which is mandatory account), Tier-II (optional and freely withdrawable) and Tier-II (optional account with Section 80C benefit but with a three-year lock-in).

See also: Check out the returns of NPS schemes

NPS income tax benefits - both for private sector employees and govt staff

Contribution towards NPS tier 1 account allows an exclusive deduction of ₹50,000 under Section 80CCD (1B).

This is in addition to the ₹ 1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. But it is to be noted 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.

Also, if an NPS subscriber opts for the new income tax slabs or rates that came into effect from April, the exclusive deduction of ₹50,000 under Section 80CCD (1B) or ₹ 1.5 lakh allowed under Section 80CCD (1) and Section 80C will not be allowed.

Under the old income tax rate regime, these benefits can be availed as earlier.

But even 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 14% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2) for central government employees. For others, the limit is 10%.

This benefit is also available if you stick to the old income tax regime.