Is the contribution to LIC Pension Fund under NPS eligible for tax saving?

Investment in the Tier I account of the National Pension System (NPS) is eligible for tax benefit irrespective of the pension fund manager chosen. Currently, there are seven pension fund managers available - Aditya Birla Sun Life, HDFC, ICICI Prudential, Kotak Mahindra, LIC, SBI, and UTI. One needs to choose anyone among them while investing. The chosen pension fund manager can also be changed once every financial year. This can be done online as well as offline through a point-of-presence (POP). You can check and compare the performance of schemes managed by different pension fund managers by visiting the 'NPS' section on our website.

NPS Tier I is the default account while opening an NPS and the money invested in it is also eligible for tax benefits. However, the invested money gets virtually locked till the age of 60. And even after that, the investor needs to utilise at least 40 per cent of the amount for buying an annuity plan. Though partial withdrawals before the age of 60 are allowed, they can be done only in certain situations. If one decides to close the account prematurely, at least 80 per cent of the amount must be utilised for buying an annuity plan unless the value of the accumulated corpus does not exceed Rs 5 lakh.

Available tax benefits
Investment in NPS Tier I can be claimed as a deduction from the taxable income under section 80C of the income tax act. Section 80C allows claiming certain investments and expenses as a deduction from taxable income. These include life insurance premiums and payment of tuition fees for up to two children. However, the benefit under the section has a maximum ceiling of Rs 1.5 lakh.

Further, one can claim an additional deduction of up to Rs 50,000 by investing in NPS Tier I under section 80CCD (1B). This section was introduced in the Union Budget 2015 with the aim of incentivising people to save and invest for their retirement.

In addition, any contribution made by the employer to the NPS Tier I account is eligible for a deduction under section 80CCD (2) of the income tax act. This exemption is beyond the exemption of up to Rs 2 lakh mentioned above. However, the employer's contribution must not exceed 10 per cent of your basic pay and the dearness allowance. In case of a central government employee, an employer's contribution of up to 14 per cent is exempt from taxation.

Tier II account
This is another variant of NPS. Opening a Tier II account is possible only after opening a Tier I account. This doesn't have any restrictions on withdrawal like a Tier I account, and one may withdraw the invested money from it any time as per the need. However, investment in a Tier II account is not eligible for tax benefits.

Though another variant of Tier II providing tax benefits under section 80C was launched in the year 2020 under the name of a tax saver scheme, it is available only for central government employees.