NPS Tier II Income Tax Benefit is Available only to These Subscribers – Find Out Whom


The contribution made in the National Pension System (NPS) qualifies for tax benefits under the Income Tax Act, 1961. On the amount invested in NPS, one can avail tax breaks under Section 80CCD (1), Section 80CCD(1B) and Section 80CCD (2) of the I-T Act. Importantly, as per Section 80CCE, the aggregate amount of deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1. 5 lakh in a financial year. Such investments by the NPS subscribers have to be made into the NPS Tier I account in order to avail deduction from income and save tax.

NPS has two accounts – Tier I, and Tier II account – while the former is the default account that one has on opening NPS account into which the initial contribution goes into. The Tier II is, however, an optional account and one can additionally open it to park savings in it as it has no lock-in period.

However, this is true only for non-government individuals. The NPS tax benefit for government employees has an advantage over the other subscribers. If a Government employee contributes towards Tier-II of NPS, the tax benefit of Section 80C for deduction up to Rs. 1.50 lakh will be available to them provided that there is a lock-in period of 3 years.

For all Government employees joining Government service on or after 1-1-2004, the pension is based on the National Pension System which works on a defined contribution basis. While the monthly contribution by the government employee will be 10 per cent of the basic pay plus DA into Tier I, for the central government, it will be 14 per cent of the basic pay plus DA.

For a non-government individual, the tax benefits are applicable for investments in Tier I account only. The investments in NPS Tier I qualifies for tax benefits under Section 80 CCD (1) Section 80CCD (1B) and Section 80CCD (2) as per the conditions of the Income Tax Act.

For the money invested in the Tier I account, there will be a lock-in period while there is no such lock-in period for funds in Tier-II account, other than those for government employee if the tax benefit is sought by them. One can withdraw funds anytime from the Tier II account similar to open-ended mutual fund investment.


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