NPS Income Tax Benefits Compared For Government and Private Employees

The Pension Fund Regulatory and Development Authority (PFRDA) has issued regulations under Section 80C for the National Pension System (NPS) tier-II income tax saving scheme on which central government employees are only allowed for tax relaxation under NPS Tier II, rather than those offered under the NPS Tier I scheme. Under Section 80CCD(1B), an exemption is allowed for the applicant, either an employee or self-employed, on the amount contributed to NPS up to Rs 50,000.

Tax Benefits For Central Government Employees Under NPS Tier II Scheme

Central government employees are allowed to claim tax exemption up to Rs 1.5 lakhs which has a lock-in period of 3 years for the contribution made towards NPS Tier II scheme. No withdrawals are approved during the lock-in term but upon the subscriber's death, the legal heir or nominee can withdraw the corpus from the account. A central government employee who is the holder of NPS can avail up to 3 accounts i.e. Tier I account (mandatory), Tier II (withdrawable but optional), and Tier III (optional account but comes with a lock-in period and tax benefits under Section 80 C).

Tax Benefits For State Government and Private Employees

Any contribution to the NPS Tier I account is liable under Section 80 CCD (IB) for an additional deduction of Rs 50,000, in contrast to Rs 1.5 lakh deduction under Section 80 CCD (1). However, the contribution amount up to Rs 1.5 lakh in a particular fiscal year towards NPS is eligible for exemption under Section 80C, 80CCC (pension plan investment provided by an insurance company), and Section 80CCD(1). The exclusive exemption of Rs 50,000 under Section 80CCD (1B) or Rs 1.5 lakh authorized under Section 80CCD (1) and Section 80C has been discontinued in the current income tax regime which came into force from April.

An exemption of up to 14 per cent for basic salary (basic+DA) is permissible for federal government employees regardless of any income tax deduction maximum qualities under Section 80 CCD (2). It is limited at 10 per cent for others, which is still accessible under the old tax regime.

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