Tax Savings

Reasons why NPS is the Best Tax saving Investment Option


Anyone earning a sufficient amount of money has to pay income tax. Yet, people can lower their tax obligations by making certain investments. The government gives tax advantages for investments in some schemes. One of the choices for this is the National Pension System (NPS). This option under Section 80C offers a wide range of tax benefits. This scheme is a ray of light for people who want financial support after retiring. Before explaining why NPS is the best choice for tax saving, let’s get into its basics.

What is NPS about?

The PFRDA oversees the working of NPS. It was initially designed for government workers. Later, the government made the program available to all. The NPS delivers market-linked returns on investments. This sets it apart from most pension plans. The scheme encourages individuals to make periodic deposits to the account until maturity. 

Professional fund managers oversee the collected fund in the NPS. Once you are 60 years old, you can withdraw 60% of the corpus. The remaining 40% should be used to purchase an annuity plan.  

Eligibility for National Pension Scheme

The following are the criteria for opening an NPS account: 

  • You should be an Indian citizen (resident or not). An Overseas Indian Citizen (OCI) can also apply for NPS.
  • Your age should be between 18 to 70.
  • Follow and submit all the documents mentioned in Know Your Customer (KYC) form.
  • One must be able to sign a contract lawfully. This is followed as per the Indian Contract Act.
  • You must not be of unsound mind.
  • You must not be a part of Hindu Undivided Families (HUFs).
  •  Persons of Indian Origin (PIOs) can’t apply for NPS.
  •  NPS is an individual pension account. A third party cannot open one on their behalf.


NPS offers two different account types: Tier I and Tier II. 

Tier I: 

The funds in the Tier 1 account are restricted until the investor turns 60. It is focused on retirement. Under certain circumstances, one may make partial withdrawals. These cases can include health issues, debts, etc. It is allowed only after three years of service. A Tier I NPS investment comes with several tax advantages. The minimum investment for this account is Rs. 1000 per year.

Tier II:

NPS Tier II accounts are opened after Tier I. They can be set up online later. You can also open them at a Point of Presence (POP). This add-on account allows you to invest and withdraw money from the NPS schemes. You won’t be charged with an exit load. 

The Tier II account allows for flexible withdrawals. It works like a standard investment plan. You are allowed to make several donations and withdrawals from it. The account gives tax benefits. It allows you to choose an asset class for investment.

Benefits of NPS:


One should plan the growth of investments properly. It’s crucial to keep track of the pension corpus. For this, NPS offers various investment options. It also allows the selection of Pension Funds (PFs). Subscribers have the option of changing their investment options. They can also switch fund managers. This benefit is valid for both accounts.


You can manage your NPS account online. Users can create an NPS account through the eNPS platform. You can also make further submissions through the eNPS portals of CRAs (Credit Rating Agencies).


A part of the NPS is invested in the stock market. The returns are not always guaranteed in this case. However, the returns gained are pretty high. It offers more than other tax-saving investments.

This program has been working for more than ten years. It has produced annualized returns of 9% to 12%.


NPS Trust regularly analyzes the performance of fund managers. The account is monitored under PFRDA. Thus, compared to similar pension programs, NPS’s account maintenance costs are low. Cost is crucial when saving cash for retirement. The fees can reduce the corpus during the long investment period.

Tax Benefits:

The following are the tax deductions offered by NPS:

  • For employees on self-contribution-  Under Section 80 CCD(1): Tax deduction up to 10% of salary (Basic + DA). The limit of deduction is Rs. 1.5 lakh. Section 80 CCD (1B): It provides further deductions up to ₹50,000. The limit can exceed Rs. 1.50 lakh.
  •  For an employee on Employer’s contribution :

Under Section 80 CCD (2): Tax reduction is 10% of the employers’ salary (Basic + DA). The limit is Rs. 1.50 lakh under Section 80 CCE.

  • Tax benefits to self-employed:Under Section 80 CCD (1): The Tax deduced is up to 20% of gross income. This is fixed at Rs. 1.5 lakh.Under Section 80 CCD(1B): Additional Rs. 50,000 is reduced in taxes. The limit can exceed Rs. 1.50 lakh.
  • For partial withdrawal from the account:    

Tax reduction is up to 25% of the contribution made by you. PFRDA gives the terms and conditions under Section 10(12B).

  • When an Annuity is bought: 

Section 80 CCD (5) exempts the taxes on annuity purchases. But, the income from these annuities is taxed. It is done according to the income tax slab rate.

  • For Lump-Sum withdrawal:

You can avail of tax exemption on lump sum withdrawals. It is eligible for 60% of the collected pension cash. This is allowed when you turn 60 years old.  


The National Pension System is the best tax-saving choice. It has developed into one of the top retirement plans. This is due to the abundance of tax advantages. You are also given flexible investment options under it.

It provides market-linked returns on deposits. This is very beneficial for your post-retirement period. 

Piramal Finance will give you excellent guidance while applying for NPS. You can visit our website for further details and queries. It’ll be our sincere pleasure to be at your service.