Under PFRDA’s Multiple Scheme Framework (MSF), non-government NPS subscribers can hold multiple schemes under a single PRAN, including high-risk variants that may offer up to 100% equity exposure, as permitted by the regulations and scheme design.
This major shift naturally raises an important question:
Do these new schemes under the MSF come with any separate tax incentives, or do the existing NPS tax benefits continue to apply?
The existing NPS tax framework—primarily deductions under Sections 80CCD(1), 80CCD(1B) and 80CCD(2) of the Income Tax Act—remains unchanged and continues to apply to eligible NPS Tier I contributions, whether invested in legacy schemes or in the new MSF variants, subject to the prevailing limits and tax regime conditions.
Tax Benefits Remain Unchanged and Powerful
Multiple Scheme Framework (MSF) is not a separate financial product; it is an architectural upgrade to the existing NPS Tier-I structure. The tax incentives, which are codified under the Income Tax Act, 1961, apply to contributions made to the NPS Tier-I account itself, regardless of the internal scheme (Common or MSF) you choose.
MSF allows subscribers to opt for higher equity allocation—potentially up to 100%—without losing existing NPS tax benefits.
The key tax benefits applicable to all contributions, including those directed toward the new MSF schemes, are as follows:
The Primary Benefit
This section covers the individual's contribution to their NPS scheme.
- Limit: The tax deduction is available for your contribution up to 10% of your salary (Basic + DA) or 20% of gross total income for self-employed individuals.
- Cap: This deduction falls under the overall Section 80C limit of ₹1.5 Lakh (Section 80CCE).
The Exclusive Bonus
This is perhaps the most celebrated and unique feature of the NPS scheme.
- Benefit: An additional deduction of up to ₹50,000 is available exclusively for contributions made to the NPS Tier-I account.
- Advantage: This deduction is over and above the ₹1.5 Lakh limit of Section 80C, allowing the NPS to potentially reduce your taxable income by an extra ₹50,000.
Deduction on Employer Contribution under Section 80CCD(2)
This benefit is particularly attractive for salaried employees in the corporate sector and remains fully applicable to MSF contributions.
- Benefit: The employer's contribution to the employee's NPS scheme is eligible for deduction.
- Limit: The deduction is up to 10% of the employee's salary (Basic + DA) and up to 14% in the case of Central Government employees. This benefit is also outside the ₹1.5 Lakh limit of Section 80C, under old Tax Regime.
In summary, a subscriber investing in the aggressive MSF scheme can avail tax benefits on contributions potentially totalling ₹2 Lakh (₹1.5 Lakh + ₹50 Thousand) from their own pocket, plus the employer's contribution.
How the MSF Leverages Tax Efficiency for Growth
The Multiple Scheme Framework is specifically designed to meet the need for higher, market-linked growth without compromising tax discipline. The fact that the same tax code applies to the new, more aggressive schemes is a powerful combination:
- Tax-Saved Contribution: The money you direct into the MSF schemes is money that has potentially been saved from taxes.
- Growth Potential: This tax-saved money then goes into a scheme, like the 100% equity MSF variant, which has the highest possible potential for long-term, market-driven growth.
- Triple Exemption Status (EEE): The NPS scheme enjoys a near-EEE (Exempt-Exempt-Partially Taxable) status, where contributions and corpus growth are exempt from tax, the lump sum withdrawal (up to 60%) at exit is tax-free, but annuity income is taxable as per your slab.
Post-Retirement and Withdrawal Tax Status
The tax treatment at the time of exit from the NPS scheme is crucial and also remains uniform for all MSF participants:
- Lump Sum Withdrawal (60%): Upon reaching 60 or superannuation, up to 60% of the accrued corpus can be withdrawn as a lump sum, which is completely tax-exempt under Section 10(12A).
- Mandatory Annuity (40%): The remaining minimum 40% of the corpus must be used to purchase an annuity. The amount used for this purchase is tax-exempt under Section 80CCD(5). However, the pension received from the annuity company in later years will be taxed as regular income per the subscriber’s slab rate.
- Partial Withdrawals: Partial withdrawals are allowed for specific purposes (like children's higher education, marriage, medical emergencies, purchase/construction of house, etc.) and are tax-free up to 25% of the employee's own contribution.
What is Not Pending for Multiple Scheme Framework
There are no known pending tax proposals specifically designed to offer additional tax breaks solely to those investing in the new Multiple Scheme Framework schemes.
However, there are ongoing discussions within the PFRDA regarding other reforms that could enhance the overall appeal of the NPS scheme, which, if implemented, would benefit MSF subscribers.
These are regulatory enhancements to the overall NPS scheme, not special tax incentives for the MSF, but they reinforce the long-term benefits of staying within this tax-efficient retirement architecture.
Conclusion
The Multiple Scheme Framework (MSF) is a tremendous leap forward for non-government subscribers, addressing the need for better growth opportunities through schemes offering up to 100% equity. The fact that this flexibility is delivered while retaining the full spectrum of existing, powerful NPS tax benefits is the true financial incentive. By channelling your tax-deductible contributions into the high-growth potential of an MSF scheme, you strategically optimize both your short-term tax savings and potentially enhance your long-term retirement wealth, subject to market risks.
Frequently Asked Questions (FAQs)
Q1: Do I get extra tax benefits for investing in the MSF 100% equity scheme?
No, the MSF schemes receive the same tax benefits as all other NPS Tier-I contributions. These include the ₹50,000 deduction under Section 80CCD(1B) and the employer contribution deduction under Section 80CCD(2).
Q2: Is the lump sum withdrawal from an MSF scheme taxable?
No. Up to 60% of the accumulated corpus withdrawn as a lump sum upon normal exit (age 60) is completely tax-exempt under Section 10(12A). However, under the MSF, any additional lump sum withdrawal beyond 60% (up to 80%) will be taxable as per your income tax slab unless government rules change.
Q3: Do tax rules differ for the Tier-I and Tier-II accounts under the Multiple Scheme Framework?
Yes. The new MSF schemes are available in both Tier-I and Tier-II. However, only Tier-I contributions are eligible for the tax deductions under Section 80CCD(1), (1B), and (2). Tier-II remains a voluntary, flexible account without these tax benefits (except for certain government employees with a lock-in).
Q4: Does the MSF change the annuity tax rule?
No. Contributions used to purchase the mandatory annuity (minimum 40%) are tax-exempt, but the subsequent pension income received from the annuity is taxed as per the subscriber's regular income tax slab.
Q5: What is the biggest tax incentive for the new MSF scheme?
The biggest incentive is the ability to leverage the ₹50,000 exclusive NPS deduction (80CCD(1B)) and the employer contribution deduction (80CCD(2)) to invest in an NPS scheme with the potential for 100% equity growth.
