The Government will continue to contribute 24 per cent towards the Employees’ Provident Fund (EPF) —12 per cent employees’ share and 12 per cent employers’ share) till August 2020 under. This will cost the exchequer Rs.4,860 crore, and benefit more than 72 lakh employees. Also, according to the Government, the National Pension System (NPS) tier-II account will be eligible for tax deduction under Section 80C. Unlike in the past, the NPS tier-II will have a lock-in period of three years now. However, private-sector employees will not have any lock-in period, but will not be eligible for any tax deductions either.
Contribution to the NPS tier-1 account is made by the employer as well as the employee. The part contributed by the central government employer, that is, 14 per cent, does not have a tax-deduction limit, whereas under Section 80C, the maximum tax deduction limit is Rs 1.5 lakh per year. This includes other contributions, such as life insurance, equity-linked savings and even compulsory deductions to NPT tier-1.
Since the government employer contribution is not bound by this limit, it is not taxable. The employee’s 10 per cent contribution, however, is mandatory and is bound by the Section 80C limit of Rs 1.5 lakh, and hence, taxable.
Employees whose contributions are below the Rs 1.5 lakh limit can make investments in life insurance or equity-linked saving schemes, provided they do not exceed the limit.
Now, the NPS tier-II account imposes a short lock-in period of three years (unlike other tax- saving schemes under Section 80C), and its returns will be taxable at slab rate.
Subscribers have the option to either choose the default NPS Central Government Scheme, with a 15 per cent equity limit or opt for a lifeycle fund with a 50 per cent equity cap, in NPT tier-1. They can also go for any of the eight pension fund managers and alternate between them annually.
It is yet to be clarified whether these same guidelines will govern NPS tier-II as per Section 80C. A notification in this regard is awaited from the Pension Fund Regulatory and Development Authority (PFRDA).