Tax Benefits Under National Pension Scheme (NPS) Explained

The National Pension Scheme was launched by the government in 2004 and has been one of the most preferred post-retirement investment options. Initially, it was made only available to the government employees, but the government made this scheme accessible to employees of all sectors since 2009. It is maintained and regulated by the Pension Fund Regulatory and Development Authority. Apart from being beneficial for building a retirement corpus, NPS tax benefits is another reason people why people choose to invest in it. 

Let’s dive in to know about NPS tax benefits in India.

NPS Tax Benefits 

Tax deduction benefits are available for the investments made on Tier I accounts only.

• You can claim tax deduction under Section 80C for up to Rs. 1.5 lakh for the given financial year. 
• Additionally, you can claim a tax deduction of another Rs. 50,000 under Section 80CCD (1B). This makes the total tax deduction amount to Rs. 2 lakh for a given year.  
• As per Section 80CCD (2), you can claim a tax deduction of 14% on your employer’s contribution (for government employees) and 10% of the employer’s contribution (if you are a private sector employee). However, since this claim can only be made on the employers’ contribution, a self-employed person is not eligible for this benefit.

Tax Benefits on Returns and Maturity Amount

The tax benefits are not limited to investment under NPS. You also don’t have to pay any tax on the returns or the maturity amount. These come under EEE (exempt-exempt-exempt) category under Section 80C.

Tax Deductions Offered by NPS

Refer to the table below to get a clearer picture of NPS tax deductions:

Critical Information on NPS

Here are a few additional tax deductions that you can enjoy with NPS:

1. Extra tax-saving options: The limit of NPS  deduction under Section 80CCD has been increased from Rs.1 lakh to Rs.1.5 lakh.
2. NPS withdrawal: Up to Rs.1 lakh contribution towards NPS and the interest earned on it isn’t taxable. However, the amount withdrawn is. 
3. EPF opt-out: The Finance Ministry has given has option to employees to opt out of EPF and invest in NPS. However, this is not mandatory and is just an option. 

Also read: Tax Implications Of Provident Fund & How To Save Tax

Types of NPS Account

There are basically two types of National Pension Schemes account one can open. A tier I account is the default account, and one can add a Tier II account voluntarily.

NPS Tier 1 vs NPS Tier 2 

You will find a detailed comparison of the two types of accounts in the table given below.

Features of the National Pension Scheme

NPS has the following features you should have a brief idea about before making your decision:

• A part of your NPS contribution goes to the equity investment that does not offer guaranteed returns. But it has a history of stable returns of around 8% to 10% annually. It also has higher returns compared to other similar savings schemes.
• Presently, the limit is set at 50% to 75% on equity exposures for NPS. For the government employees and investors of age 60, this limit is set at 50%. The equity portion mentioned in the range will keep reducing by 2.5% per year starting from the year in which the investor turns 50. These ranges are prescribed, keeping in mind the safety of investments. 
• As per Section 80CCD (1), you can claim a tax deduction of up to Rs. 1.5 lakh on investments under NPS, which should not exceed 10% of the salary. For a self-employed person, this limit is set at 20% of his/her gross income. 

However, you can claim an additional tax deduction on self-contribution of up to Rs. 50,000 as per provisions of Section 80 CCD(1B)

• Post-retirement, you can withdraw only 60% of the entire amount available; you have to keep the rest 40% in order to receive a  regular income as a pension. 
• Early withdrawal is allowed only when you have been investing for at least three years. After that, you can withdraw a maximum of 25% for certain events like children’s higher education or wedding, medical emergency of self or family etc. You can withdraw three times with a gap of five years in between. 
• Your investment in NPS is divided into different schemes, and Scheme E is for equity allocation. There are two options for equity – auto choice and active choice. If you choose auto choice, the allocation is decided upon your age, but for active choice, you have the option to split the investments. 
• You have an option to change your fund manager if you are not satisfied with the performance, which is available for both Tier I and Tier II accounts. 

NPS Calculator

You can use an online NPS calculator to know the estimated amount you might receive as a pension. You need to enter the following details to calculate your monthly pension – your date of birth, investment tenure (investment up to 65 years, 75 years, etc), contribution amount, total years of contribution, annual increase in contribution, the expectation of return on investment, % invested in an annuity, and rate of the annuity (in %).

An NPS calculation would give you accurate results based on these data. 

Also read: What Are Retirement Mutual Funds: Benefits, Tax & Should You Invest?

Final Words

The benefits and features of NPS and NPS tax benefits are discussed in this article to help you make a better decision regarding investments. There are other schemes available in the market which provide higher returns and are cost-effective. However, your decision depends on your risk profile and your investment goals. 

If building a retirement corpus is your goal, NPS can be an ideal option.

FAQs on NPS Tax Benefits

Read More on Income Tax Act