The center in its notification has now allowed NPS Tier II account as eligible for tax deduction as part of Section 80C. In a previous regime, investments in NPS II were without lock-in but now it shall attract a lock-in of 3 years for contributions by government sector employees.
Notably, the breather is allowed for only government employees, for private workforce there shall be no tax deduction benefit granted on NPS tier II account. Also it will continue to be without a lock-in.
For government employees NPS tier I account comprises two components:
Employer contribution: 14% contribution of the centre that is not part of the Section 80C limit and is neither taxable.
Employee contribution: 10% of basic pay and DA that is compulsory as well as comes under the purview of section 80C Rs. 1.5 lakh limit, including other investment instruments including the likes of PPF, NSC etc.
So, among these employees there can be many whose entire limit of Rs. 1.5 lakh is not used via NPS tier I investment and hence they can also consider investment in NPS Tier II account providing the relief now on tax aspect.
Thus NPS Tier II account will have a lower lock-in similar to ELSS of 3-years and its returns will be taxed at the slab rate of the investor.