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NPS Tier II Tax Saver Scheme 2020 – Benefits

by nidhimehra about a year ago in investing

The National Pension System (NPS) has become quite a popular investment avenue for many investors. It is because the NPS scheme offers multiple benefits under a single scheme which attracts investors.

NPS Tier II Tax Saver Scheme 2020 – Benefits
Photo by Michael Longmire on Unsplash

NPS Tier II Tax Saver Scheme 2020 – Benefits

The National Pension System (NPS) has become quite a popular investment avenue for many investors. It is because the NPS scheme offers multiple benefits under a single scheme which attracts investors. These benefits include –

  • Creation of a retirement fund
  • Market-linked investment returns
  • Long term investment for wealth creation
  • Tax benefits on investments as well as on the corpus created

The tax benefit of the NPS scheme is, in fact, one of the many reasons why investors choose to invest in it. The Income Tax Act, 1961 offers tax benefits under multiple Sections on the investments which are done into the NPS scheme. There are two types of NPS accounts, Tier I and Tier II Account, and investment into Tier I Account earns you the following tax benefits -

  1. Tax benefit under Section 80 CCD (1)

If you invest in NPS online, your investments would be allowed as a deduction from your taxable income under Section 80 CCD (1). You can claim a maximum deduction of up to Rs.1.5 lakhs which includes the deductions available under 80 C. This deduction is available to Government employees, non-Government employees as well as self-employed individuals. For employees, the maximum investment allowed is 10% of the basic pay and dearness allowance while for self-employed individuals, investment of up to 20% of their gross annual income would qualify for deduction under this Section.

2: Tax benefit under 80 CCD (2)

This benefit is available for salaried individuals if their employers contribute to the NPS scheme. Employer’s contribution to the NPS scheme is allowed as a deduction up to 10% of the basic pay and dearness allowance. This deduction is available over and above other deductions which you can claim. Moreover, if you choose the new tax regime then also you can claim deduction under this Section.

3: Tax benefit under 80 CCD (1B)

This Section allows you an additional deduction from your taxable income over and above the deduction available under the above-mentioned Sections. Contributions up to Rs.50, 000 are allowed as an additional deduction under this Section.

Though these tax benefits are available on NPS investments, the Government introduced a new operational guideline in July 2020 which extended tax benefits on NPS Tier II accounts too. Let’s understand what the new guidelines state –

PS Tier II Tax Saver Scheme 2020

In a notification issued on 7th July 2020, the Government introduced tax benefits on NPS Tier II Account too which was not allowed earlier. As per the guidelines issued, the NPS Tier II Tax Saver Scheme has the following features and benefits –

1: The tax saving benefit would be allowed to Government employees only

2: Contribution to Tier II Account of the NPS scheme, Rs.1.5 lakhs, would be allowed as a deduction from the taxable income under Section 80C

3: To avail the tax benefit, your investment would be locked in for a minimum of 3 years

4: The minimum amount of contribution to open a Tier II Account is Rs.1000 and subsequent contributions needed to keep the account active is Rs.250

5: Government employees would, therefore, have a choice of three types of NPS accounts to invest – Tier I Account which would be mandatory, Tier II Account which is voluntary and which allows easy withdrawals without any tax benefits and Tier II Account which allows tax benefits on investment but comes with a lock-in period of 3 years

6: If you contribute to the NPS Tier II Tax Saver Scheme, you can choose your NPS fund managers but you cannot choose the investment funds or strategy. The investment would be automatically allocated to equity, debt and liquid funds in the proportion of 10% to 25%, up to 90% and up to 5% respectively

7: You can choose a maximum of three pension funds under this scheme which three different NPS fund managers. Moreover, the NPS fund managers can be changed after the completion of the lock-in period of 3 years

8: If Tier I Account is closed, Tier II Account would also be closed after the completion of the lock-in period

9: In case of death during the lock-in period, the nominee can withdraw the investments in a lump sum before the completion of the lock-in period.

The NPS Tier II tax saver scheme is, therefore, a welcome change for Government employees who can claim deductions by contributing to the Tier II Account too. For non-Government employees, however, the facility is not available. So, if you are a Government employee and want to invest in NPS online, download the ETMONEY app, the best personal finance platform. The reason why ETMONEY is the best personal finance platform is that it allows you to invest in NPS online with a minimum of fuss. You can open the NPS Tier II Account within minutes, without physical paperwork and online investments. Your KYC can be verified through scanned copies of your documents which simplify the whole process of investing into the NPS scheme. So, download the ETMONEY app, the best personal finance platform, and get the tax benefit of NPS Tier II Account.

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