Tax Savings

What you need to know about tax benefits of nps in India?


National Pension Scheme (NPS) is an optional, long-term investment strategy for retirement. The Central Government along with the Pension Fund Regulatory and Development Authority (PFRDA) are in charge of it. In this article, we will discuss in detail the tax advantages offered by NPS.

What is National Pension Scheme (NPS)?

The Central Government launched the National Pension Scheme as a social security programme for all individuals. However, those performing any sort of military service are not included in this scheme.

The programme asks for a periodic contribution to a pension account during your employment tenure. You can withdraw only a specified amount of investment before retirement. The remaining amount will be credited to your account on a monthly basis after retirement.

For those employed in the private sector, there are many Tax benefits of NPS as it offers deductions under Sections 80C and 80CCD. Moreover, this account is also transferable in cases of job switches.

Who should invest in the NPS?

People who are looking to make a retirement plan and are low on their risk appetite must consider NPS as an investment option. Having a steady pension in a methodical manner post-retirement has a huge impact on your life. Salaried individuals who look forth to saving taxes and investing more can consider this plan under 80C.

Features of NPS

  1. Returns/Interest – NPS invests a portion of money in stocks, which allows it to provide a higher return when compared to PPF. This programme has been in place for more than ten years and has thus far produced annualised returns of 9% to 12%. 
  1. Risk Assessment – The upper margin of equity exposure in the National Pension Scheme is between 50-75%. For government workers, it is set at 50%. There is also an attached condition that the equity component will decrease by 2.5% annually after an investor turns 50 years of age. However, the margin of exposure in equity cannot fall under 50% in any circumstance. Hence, investing in NPS stabilises the risk-return ratio of the investors, protects their corpus and also provides a steady return.

Tax benefits of NPS

The employee’s and employer’s National Pension System contributions are exempt from tax up to Rs. 1.5 lakh. You can claim the tax benefits of NPS under Sections 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act.

  • Self-contribution is covered by Section 80CCD(1) of the tax code. The maximum deduction for salaried workers is 10% of their pay, whereas the maximum deduction for self-employed people is 20% of their gross income.
  • Employer contributions to NPS are covered by Section 80CCD(2), which is also a part of Section 80C. Self-employed people are not eligible to get this benefit. You may only deduct up to 10% of your basic income plus Dearness Allowance or the employer’s NPS contribution, whichever is greater.
  • You may claim Rs. 50,000 as an add-on NPS tax advantage for self-contributions made under Section 80CCD(1B).

Therefore, under NPS, people may claim tax benefits of NPS of up to Rs. 2 lakh.

Things to remember:

  • Tax savings: Those in the highest tax category of 30% can save an additional Rs. 16,000 in taxes thanks to the extra Rs. 50,000 deductions on NPS. Employees can save over Rs. 10,000 in the 20% tax band, and Rs. 5,000 can be saved by those in the 10% tax bracket.
  • Opting out of EPS: The Finance Minister intends to provide employees with the choice to forego EPF and invest in NPS instead for their retirement.
  • Tax on withdrawal: There hasn’t been a prolongation of the tax benefits for NPS withdrawals. As a result, contributions to the NPS up to Rs. 1.5 lakh and the interest received are tax-free, but the amount withdrawn is not.
  • Extra tax saving options: The total deduction allowed under Sections 80C and 80CCD of the Income Tax Act would now be up to Rs. 2 lakh, thanks to the additional Rs. 50,000 deduction on NPS. The cap for deductions under section 80CCD, including contributions to the NPS, has also been raised from Rs. 1 lakh to Rs. 1.5 lakh. This should provide investors with more possibilities for tax reduction in turn.
  • Withdrawal options: Once you are 60 years old, you will have the option of leaving NPS. You must use at least 40% of the total pension wealth to purchase an annuity for your monthly pension. The balance is paid as a lump sum. The annuity service providers are in charge of providing a consistent monthly pension once the subscriber leaves the NPS.
  • NPS structure: Tier-I and Tier-II accounts make up the NPS scheme:
  • Tier I – This is a non-withdrawable account intended only for retirement. Contributions made to this account are tax-deductible.
  • Tier II – Only individuals who have an active Tier I account may start a voluntarily withdrawable Tier II account. You will have the option of making withdrawals from your account as needed. This works in the same fashion as a normal bank savings account.
  • Minimum deposit: While the minimum contribution is Rs. 500 in a single deposit, the minimum deposit for a Tier-I account is Rs. 6,000.
  • Opening an NPS account: To offer NPA-related services, the majority of banks are registered with PFRDA. Anyone between the ages of 18 and 60 is eligible to open an NPS account. Online tracking is available for both transactions and the current fund value.
  • Portability: Once your NPS account opens, you will receive a PRAN. This is a distinct integer that never changes. You have the choice of portability with NPS between locations and jobs.


Consider investing in the NPS scheme for the advantages mentioned above. Understand your risk tolerance and investment objectives before making a decision. However, if you want more equity exposure, consider investing in some other options.

Read more at Piramal finance about NPS and don’t forget to explore their vast range of products and services.