Financial stability after you retire is very important and the National Pension Scheme offers you the opportunity to invest long-term for your future. The NPS is a voluntary savings scheme where you can contribute a certain amount regularly during your working days, helping you accumulate your savings for financial security post-retirement. When planning for retirement, you must take taxes into account. This is because taxation on retirement can take away the value of your savings. However, the National Pension Scheme offers tax benefits.
With the National Pension Scheme tax benefits you get to maximise your savings with lower tax liabilities, thereby offering you an efficient and flexible retirement planning option. The NPS offers Tier 1 and Tier 2 accounts that offer many tax benefits. Helping you secure your financial future.
The National Pension Scheme follows the Exempt-Exempt-Exempt (EEE) tax regime, where the principal investment amount, interest, and 60% of the maturity amount are exempted from taxes.
Table of Contents:
- ⇾ NPS Tier 1 Account Tax Benefits
- ⇾ NPS Tier 2 Account Tax Benefits
- ⇾ NPS Tax Benefits For Self-Employed
- ⇾ NPS Tax Benefits on Withdrawals
- ⇾ NPS Tax Benefit on Lump Sum Withdrawal
- ⇾ NPS Tax Benefits on Maturity Amount
- ⇾ Advantages of EEE System in NPS
- ⇾ Understanding NPS Tax Benefits with Example
- ⇾ Frequently Asked Questions
NPS Tier 1 Account Tax Benefits
The NPS Tier 1 account is a primary account that is offered to all contributors and it is the main account where your retirement corpus will be held. It has a strict lock-in period until you reach the age of 60 years with limited withdrawal options. The NPS Tier 1 account offers various tax benefits including Section 80CCD(1), 80CCD(2), and 80CCD(1B). Here are the benefits:
| Income Tax Acts | Benefits |
| 80CCD (1) | You can contribute up to ₹1.5 lakhs in your NPS account, which can also be claimed as a tax deduction of up to ₹1.5 lakh. |
| 80CCD (2) | Under this Section, only salaried individuals can claim tax benefits. Government employees can claim 14% while private sector employees can claim up to 10%. |
| 80CCD (1B) | An additional deduction of up to ₹50,000 is available for contributions to the NPS Tier 1 account under Section 80CCD (1B). This is over and above the ₹1.5 lakh limit under Section 80C. |
NPS Tier 2 Account Tax Benefits
The NPS Tier 2 account is an additional account to which you can contribute voluntarily to save additional funds towards your retirement. While the NPS Tier 2 account offers more flexibility with withdrawals, it does not offer the tax benefits that Tier 1 does.
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NPS Tax Benefits For Self-Employed
As a self-employed individual, you can get NPS tax exemptions of up to 20% of your gross income under Section 80CCD (1) with a maximum deduction of up to ₹1.5 lakhs. Additionally, you can also claim an extra NPS tax benefit of up to ₹50,000 deduction under Section 80CCD(1B). These tax benefits can help you potentially save up to ₹2 lakhs in tax exemptions in one financial year.
NPS Tax Benefits on Withdrawals
You can withdraw from your NPS account before maturity, these partial withdrawals are allowed for specific purposes like education, medical treatment, wedding, or for purchasing a house. For partial withdrawals, tax will be exempted.
Furthermore, upon retirement, you can withdraw up to 60% of your retirement corpus which is going to be tax-free. However, the remaining 40% must be used to purchase an annuity which is taxable as per your income tax slab at the time of annuity receipt.
NPS Tax Benefit on Lump Sum Withdrawal
When you reach the retirement age of 60 years, you can withdraw up to 60% of your retirement savings. The NPS tax benefit on lump sum withdrawal is that it will be entirely tax-free. Helping you save a maximum amount of your retirement fund. This encourages you to save more towards your retirement fund with NPS as a huge portion can be withdrawn without any tax implications.
NPS Tax Benefits on Maturity Amount
The NPS tax benefits offered to you are that upon maturity, 60% of the withdrawal amount will be exempt from taxes. Furthermore, in the unfortunate event of the death of a subscriber, the entire retirement corpus that has been collected will be paid to the nominee. This amount will also be fully exempt from taxes.
Advantages of EEE System in NPS
The Exempt-Exempt-Exempt (EEE) tax regime is a tax benefit where the investment amount, interest amount, and maturity amount are exempted from taxes. The EEE tax regime also falls under the National Pension Scheme tax benefits, where the contributions made to an NPS account are liable for tax deductions under Section 80CCD(1), the returns on the investment are tax-free which is the second exemption, and withdrawals upon maturity are partially tax-free. The NPS following the EEE tax regime allows you to potentially save significantly on tax and also encourages more subscribers to save for long-term retirement planning.
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Understanding NPS Tax Benefits with Example
The National Pension Scheme offers tax benefits to subscribers including Government employees and private sector employees. For your better understanding, here is an example of the tax benefits that government and private sector employees get:
Let’s imagine you are a private sector employee and your taxes are deducted according to your income tax bracket with your employer also contributing to your NPS account. Here is an example below:
| Employee contribution only | Employee and Employer Contributions | |||||
|---|---|---|---|---|---|---|
| Tax Rates | 10% | 20% | 30% | 10% | 20% | 30% |
| Salary (Basic + DA) | 4,00,000 | 8,00,000 | 15,00,000 | 4,00,000 | 8,00,000 | 15,00,000 |
| Allowances | 1,00,000 | 2,00,000 | 3,00,000 | 60,000 | 120,000 | 1,50,000 |
| Employer NPS Contribution (10% of Salary) | Nil | Nil | Nil | 40,000 | 80,000 | 1,50,000 |
| Gross Taxable Salary (A) | 5,00,000 | 10,00,000 | 18,00,000 | 5,00,000 | 10,00,000 | 18,00,000 |
| Employee Contribution u/s 80 CCD(1) (10% of Salary) | 40,000 | 80,000 | 1,50,000 | 40,000 | 80,000 | 1,50,000 |
| Employer Contribution u/s 80 CCD(2) (10% of Salary) | Nil | Nil | Nil | 40,000 | 80,000 | 1,50,000 |
| Additional Contribution u/s 80 CCD(1B) (Maximum upto Rs.50,000) | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 |
| Total Deductions (B) | 90,000 | 1,30,000 | 2,00,000 | 1,30,000 | 2,10,000 | 3,50,000 |
| Taxable Salary (A-B) | 4,10,000 | 8,70,000 | 16,00,000 | 3,70,000 | 7,90,000 | 14,50,000 |
| Tax (without cess) | 16,000 | 99,000 | 3,05,000 | 12,000 | 83,000 | 2,60,000 |
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The table below shows an example if you are a government employee where your tax is deducted under your income tax slab. Here is an example of your NPS tax benefits if you and your employer contribute to your NPS account.
| Tax Rates (as Applicable) | 10% | 20% | 30% |
|---|---|---|---|
| Salary (Basic + DA) | 4,00,000 | 10,00,000 | 15,00,000 |
| Allowances | 1,00,000 | 1,00,000 | 1,50,000 |
| Employer NPS Contribution (10% of Salary) | 40,000 | 1,00,000 | 1,50,000 |
| Gross Taxable Salary | 5,40,000 | 12,00,000 | 18,00,000 |
| Less: Deductions | - | - | - |
| Employee Contribution u/s 80 CCD(1) (10% of Salary) | 40,000 | 1,00,000 | 1,50,000 |
| Employer Contribution u/s 80 CCD(2) (10% of Salary) | 40,000 | 1,00,000 | 1,50,000 |
| Additional Contribution u/s 80 CCD(1B) (Maximum upto Rs.50,000) | 50,000 | 50,000 | 50,000 |
| Total Deductions | 1,30,000 | 2,50,000 | 3,50,000 |
| Taxable Salary | 4,10,000 | 9,50,000 | 14,50,000 |
| Tax (without cess) | 16,000 | 1,15,000 | 2,60,000 |
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Besides NPS, you can also check and invest in other retirement schemes and other saving schemes with better returns. Check the table below with links for details:
Frequently Asked Questions
The National Pension Scheme offers tax benefits under Section 80CCD(1), 80CCD(2), and 80CCD(1B).
You can save up to ₹1.5 lakhs under Section 80CCD(1) along with an additional ₹50,000 under Section 80CCD(1B) which adds up to ₹2 lakhs in one financial year.
Yes, employers can deduct their NPS contributions for employees (up to 10% of salary) as a business expense, lowering their taxable income.
The tax deduction limit under Section 80CCD(1) is up to ₹1.5 lakhs.
Yes, you can claim an additional tax deduction of ₹50,000 under Section 80CCD(1B).
Yes, partial withdrawals are exempt from taxes and for lump sum withdrawals, 60% will be exempted from taxes.
Taxes for partial withdrawals from an NPS account are exempted.
NPS annuity payments are taxed as regular income according to your applicable tax slab.
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