NPS Tier II Tax Saver Scheme: Should you invest?

Published: July 8, 2020 at 7:33 pm

Last Updated on September 15, 2021

The finance ministry has notified the National Pension Scheme Tier II- Tax
Saver Scheme, 2020 under section 80C for central government employees.

What is the national Pension Scheme Tier II- Tax Saver Scheme, 2020? From 1st April 2020 onwards central government employees with mandatory NPS accounts can save tax with a Tier II account. However, the total tax saving benefit will be limited to 1.5 lakh under section 80 C. That is, if a central government employee invests say Rs. 1.2 lakh in Tier I, then Rs. 30,000 can be invested in Tier II for tax saving under 80 C.

Can non-central government employees avail this tier II tax benefit? No. This is only for central government employees.

Is there a lock-in period? Yes.Three years from the date of credit of the amount to the specified account.

What is the min investment? Rs. 1000 for Tier II account activation and a minimum contribution of Rs. 250 thereafter.

If I am already investing Rs. 1.5 lakh in Tier I, can I avail this benefit? You are free to invest any amount in Tier-II however the total Tier I and Tier II contributions per financial year eligible for 80C deduction will only be Rs. 1.5 lakh.

Who will benefit from this scheme? Those who can invest Rs. 1.5 lakh already in TIer I have no need for this. This a move to popularize Tier II. The only benefit here is, the amount is free to be redeemed in full after three years if this benefit is being available. Else it can be redeemed at any time.

Is the amount tax-free? This is is a big unanswered question. The taxation rule on Tier II redemptions has not been notified by the government.

I am a central government employee. Should I avail this benefit? If the taxation on redemption is clarified and if you need the money after three years, you can use this for tax saving. However, be careful with the asset allocation as NPS is a mutual fund subject to market risks.

If I choose the new tax regime, can I still avail this benefit? No. Section 80C is not applicable under the new tax regime

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