After the government last month notified National Pension System (NPS) tier-II account as eligible for tax deduction under Section 80C, pension regulator Pension Fund Regulatory and Development Authority or PFRDA has come out with detailed guidelines. Earlier, the NPS Tier-II account had no lock-in, but now such tax-deductible contributions by the government employees will be locked in for three years.
Here are 10 things to know about NPS Tier II income tax saver scheme:
- Only central government employees are eligible for income tax benefits under the NPS Tier II scheme. Private sector employee's contributions to the NPS Tier-II account will continue to remain free from lock-in but will not get tax deductions.
- The central government employee's contribution towards Tier-II of NPS for availing income tax deduction under Section 80C (up to ₹1.5 lakh) per year will have a lock-in period of 3 years.
- The central government employee who wants to avail of this tax benefit will 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).
- The NPS Tier II tax saver account does not offer any investment choice to the subscriber.
- The asset class allocation mix of equity (10% to 25%), debt (up to 90%) and cash/money market/liquid funds (up to 5%).
- No withdrawal will be allowed during the lock-in period of three years. However, in case the death of the subscriber, the corpus can be withdrawn by the nominee/legal heir.
- In case of closure of the Tier-1 NPS account due to exit from NPS, further contributions will not be allowed to the NPS Tier II tax saver scheme. NPS Tier II tax saver scheme will be closed after completion of the lock-in period.
- The subscriber to NPS Tier II tax saver scheme can choose any pension fund.
- But the subscriber will be permitted to have a maximum of three pension funds separately for the NPS Tier II tax saver scheme.
- Pension fund change will be allowed only after the lock-in period. Such reinvestments will be treated as fresh investments and again will be locked in for three years.