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

The pension regulator Pension Fund Regulatory and Development Authority or PFRDA has issued 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 the NPS Tier II scheme. This is in addition to the income tax benefits available under the NPS Tier I scheme.

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

The contribution of a central government employee to the NPS Level II account to benefit from the income tax deduction (up to Rs 1.5 lakh) per year will have a lock-in period of 3 years.

No withdrawals will be allowed during the three-year reservation period. However, in the event of the death of the subscriber, it can be withdrawn by the candidate / legal heir.

A central government employee who wishes to take advantage of this tax benefit can have three NPS accounts: Level I (which is a mandatory account), Level II (optional and freely withdrawn), and Level II (an optional account with the Section 80C feature) but with a three-year lock-in).

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

Contribution to an 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 in NPS. But it should be noted that the total amount of deduction under Sections 80C and 80CCC (Investment in Pension Plan provided by the Insurance Company) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh per financial year.

In addition, if an NPS subscriber chooses the new income tax tables or rates that take effect from April, the exclusive deduction of 50,000 RUB under Section 80CCD (1B) or Rs. 1.5 lakh allowed under Section 80CCD (1) and Section 80C will not be Permissible.

With the old system of income tax rates, these benefits can be used as before.

But even if you choose the new tax rates, you can still claim an income tax deduction on the employer's contribution to the employee's NPS account.

If your employer contributes to your NPS account, deduct up to 14% of your salary (base + DA) regardless of the qualifying threshold 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.

Source: Livemint

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