NPS Tax Benefits – A Detailed Guide


When the National Income System (NPS) was first established, it was intended to give retired central and state employees a monthly income. At the moment, anybody can invest in NPS, including self-employed people, other paid persons, and corporate workers. Moreover, subscribers are eligible for a number ofNPS tax benefits in addition to the retirement pension. In this blog, we’ll talk about the tax advantages that NPS provides to investors.

What is NPS?

On December 22, 2003, the National Pension System (NPS) was implemented for central government workers, with the exception of those in the military forces. NPS is a programme that allows people to contribute to their future while they are employed voluntarily. Depending on the investment made, these contributions would accrue over time.

People are encouraged to contribute to a pension account on a regular basis while they are employed under the NPS system. This investment aids in retirement planning since subscribers may withdraw a certain percentage of the entire invested amount, with the remaining amount provided to them as a monthly pension.

The Pension Fund Regulatory and Development Authority, which oversees the NPS system, initially restricted its coverage to central government employees. However, it has since expanded to include all Indian residents upon their voluntary request. NPS is, therefore, accessible to the public, private, and even unorganised sectors in the modern day.

We are always drawn to a single item that has several uses. The same is true for NPS, the most desirable national pension plan in India. NPS just isn’t a long-term retirement plan; it lets you save taxes concurrently. You can save taxes over this threshold or within Section 80C using NPS tax saving. Both self-employed and salaried workers may save money on taxes with NPS.

What are the Types of NPS Accounts?

The National Pension System (NPS) provides a structured and adaptable approach to investments through its two distinct account categories: Tier 1 and Tier 2 accounts. When enrolling in the NPS, a unique Permanent Retirement Account Number (PRAN) is assigned to each participant, facilitating account setup. All activities related to fund management and contributions to the NPS are conducted through this PRAN. Now, let’s delve into the details of what Tier 1 and Tier 2 signify in the NPS.

NPS Tier 1 Account

This account is subject to a predetermined lock-in period that extends until the account holder reaches the age of 60. It allows for partial withdrawals under specific conditions. Contributions made to Tier 1 accounts are eligible for tax deductions as per Section 80CCD (1) and Section 80CCD(1B). This means that individuals can invest up to Rs 2 lakhs in the NPS Tier 1 account, and the entire amount qualifies for a tax deduction, which is Rs 1.50 lakh under Section 80CCD (1) and Rs 50,000 under Section 80CCD (1B).

NPS Tier 2 Account

This optional savings account permits subscribers to make withdrawals as required. The account can be initiated with a minimal deposit of Rs 250. Nevertheless, contributions directed to the NPS Tier 2 account do not qualify for tax deductions. Importantly, it is a prerequisite to possess a Tier 1 account if you intend to establish a Tier 2 account.

What are the Tax Saving Benefits of an NPS Account?

Ever since the NPS scheme became available to the general public in 2009, it has gained considerable popularity as a retirement savings option in India. In addition to its cost-effectiveness, the NPS has garnered favour due to its tax benefits. However, it’s crucial to note that tax advantages are applicable exclusively to Tier 1 of the NPS account. Here are some of the tax exemptions individuals can enjoy when opting for the NPS scheme:

Tax Benefits Under Section 80C

Since investments in the NPS scheme fall under the purview of Section 80C of the Income Tax Act, a participant has the opportunity to seek deductions of up to Rs 1.5 lakhs. This sum can be directed towards the NPS scheme to take advantage of the deduction.

Tax Benefits Under Section 80CCD (1B)

This supplementary tax advantage is tailored explicitly for NPS investors. Within this Section, tax deductions can be requested for investments of up to Rs 50,000. This is in addition to the deductions that can be sought under Section 80C. Consequently, by investing in NPS, a total tax deduction of up to Rs 2 lakhs can be claimed: Rs 1.5 lakhs under Section 80C and an extra Rs 50,000 under Section 80CCD (1B). For instance, if an individual falls into the 30 per cent tax bracket, they can potentially save Rs 62,400 in taxes.

Tax Benefits Under Section 80CCD (2)

This advantage is designed for individuals who receive a salary and can be accessed based on contributions made by the employer. Government employees can seek a tax deduction under this Section for up to 14% of their salary, whereas private sector employees are eligible for a 10% deduction.

Tax Benefits on Returns and the Maturity Amount

NPS tax savings go beyond the invested sum. Furthermore, investors are not obligated to pay taxes on the maturity amount due to the NPS program’s tax status, known as exempt-exempt-exempt (EEE). The tax advantages of the National Pension Scheme can substantially reduce the taxable income for subscribers.

Nonetheless, there are additional compelling reasons why NPS stands out as an excellent investment choice. Its affordability and adaptability make it a valuable tool for constructing a retirement fund.


Therefore, if the advantages outlined above align with your risk tolerance and investment objectives, it is advisable to contemplate investing in the NPS scheme. However, if you are open to a higher level of equity exposure, numerous mutual funds are accessible to cater to investors from various financial backgrounds.

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