Central government staff can claim 80C benefits on NPS Tier-II contribution

Central government employees who wish to contribute to the National Pension System (NPS)-Tier II accounts will now be able to claim deductions under section 80C.

The finance ministry has notified new tax rules applicable to NPS Tier-II accounts, which did not enjoy tax benefits so far. Even now, the benefit is extended only to central government employees who invest under NPS Tier-II Tax Saver Scheme, 2020. “This is an official notification of the scheme that was announced earlier. Central government employees can now contribute more to NPS and not suffer the long lock-in period,” says Archit Gupta, Founder and CEO, Cleartax.

The modification will come into effect immediately. The minimum amount of investment under the scheme, which comes with a lock-in period of three years, is Rs 1,000 while activating the account and subsequent minimum contributions will be Rs 250.

Tax deduction

Under section 80C, investments of up to Rs 1.5 lakh are allowed as deductions under the Income Tax Act, 1961. It covers a wide range of instruments, including employees’ provident fund, equity-linked saving schemes (ELSS), life insurance policies, NPS (Tier-I) as also small savings schemes such as public provident fund (PPF) and Sukanya Samriddhi Account (SSA). Barring ELSS, all other instruments carry a lock-in period that is longer than three years, making NPS-Tier II an attractive option for central government employees. “They will get tax benefits, besides access to well-managed and regulated funds with low charges. However, the returns earned during the period will be taxable,” says Gupta. A regular Tier-II account allows subscribers the flexibility of using it like a savings account – investing and withdrawing without charging any exit load.

Tier-II accounts can be opened by NPS subscribers who maintain a Tier-I account – the primary account that manages your retirement funds and also offers tax benefits under sections 80CCD (1), 80CCD (1B) and 80CCD(2).