NPS Tax Benefits

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Regular post-retirement income | Additional tax benefit on investments up to ₹50,000 u/s 80CCD (1B) - EEE Category | Regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India) Invest Now

The National Pension Scheme (NPS) offers tax benefits under sections 80CCD and 80C, and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The social security scheme is portable between locations and jobs.

Workers in the private, public, and unorganised sectors, excluding members of the armed forces, are eligible for this pension scheme. Post-retirement, NPS account holders can opt for a lump sum withdrawal from their corpus, while the remaining portion is disbursed as a monthly pension.

Tax Benefits Under NPS Tier I Account

NPS provides investors with two account options: Tier I, a compulsory account for all NPS investors, and Tier II, an optional account. The NPS Tier II account doesn't offer tax benefits, whereas the NPS Tier I account qualifies for deductions under sections 80CCD(1), 80CCD(1B), and 80CCD(2).

Here is an overview of the tax exemptions provided under these sections:

Income Tax Section	NPS Deduction	Description
80CCD (1)	Self-contribution	Up to ₹1.5 Lakhs can be claimed for deduction
80CCD (2)	Salaried individuals	Government and private sector employees can claim 14% and 10% of their salary, respectively
80CCD (1B)	Additional self-contribution	Up to ₹50,000 can be claimed for deduction

For NPS Tier I accounts, both your contribution and the employer's contribution are eligible for a deduction of up to ₹1.5 Lakhs. The self-contribution, a component of Section 80C, is covered by 80CCD (1) of the Income Tax Act, 1961.

10% of the salary is the maximum cap of deduction allowed u/s 80CCD (1). This limit is 20% of the taxpayer's gross income if they are self-employed.

The employer's NPS payment is covered by Section 80CCD (2) and is not included in Section 80C. Self-employed taxpayers are not eligible for this benefit.

Additional Tax Exemptions Under NPS

Investors can enjoy additional NPS deductions beyond annual tax benefits under sections 80C and 80CCD (1B), such as the following:

On Partial Withdrawal

After three years, investors can withdraw up to 25% of the corpus for events like medical expenses, weddings, or education. There is no tax due on this withdrawal

On Lump Sum Withdrawal

Upon reaching 60 years of age, investors can avail a tax-free lump sum withdrawal of 60% from the total accumulated corpus under Section 10(12A).

On Returns

NPS Tier I account returns are not taxed until they reach maturity. Hence, investors won't be taxed on market-linked returns.

Upon Maturity

After turning 60, up to 60% of the corpus can be withdrawn as a lump sum, with the remaining 40% used to purchase annuities. Both of these are tax-exempt.

For example, if an individual is 60 years old and has a corpus of ₹10 Lakhs, only up to ₹6 Lakhs can be withdrawn. The remaining ₹4 Lakhs will be used to purchase annuities providing retirement pensions.

On Purchase of Annuity

Upon maturity, 40% of the total NPS corpus must be allocated to annuities, qualifying for tax exemption under Section 80CCD (5). However, the annuity income generated is subject to taxation based on investors’ applicable income tax slab.

EEE Benefit under NPS

Exempt-Exempt-Exempt (EEE) is a tax treatment applied to certain financial instruments, investments, or savings schemes. NPS enjoys the EEE status in India because NPS tax exemptions currently cover the investment amount, corpus growth, and maturity amount (to a certain extent).

For an investment to be considered an EEE, it must:

Entitle you to a tax deduction from your yearly wage or income up to the amount of your investment
Have tax-free interest or gains on the invested sum
Remain non-taxable upon reaching maturity

The EET tax status applied to NPS investments before the 2019 Union Budget. This meant that up to 20% of the corpus, or the maturity amount, was earlier subject to taxation up on lump sum withdrawal. However, the 2019 Union Budget dictated that the entire 60% corpus withdrawal is tax-free.

Additional Tax Benefit under Corporate NPS for Salaried Individuals

Employees who invest through their workplace receive additional tax benefits under Corporate NPS. According to Section 80CCD (2), such investments of up to 10% of salary (Basic + Dearness Allowance) to the maximum of ₹7.5 Lakhs are deducted from taxable income.

All NPS Tier I subscribers receive a special tax benefit under Section 80CCD (1B) for an additional deduction of up to ₹50,000. This is over and above the deduction of ₹1.5 Lakhs permitted u/s 80C.

What is the amount I should invest in NPS to receive tax benefits?

You can claim deductions of up to ₹2 Lakhs on NPS investments. By investing this amount, they qualify for a tax deduction of up to ₹1.50 Lakhs under Section 80C and an additional ₹50,000 under Section 80CCD(1B)

Can I invest in NPS if I'm in the lowest tax slab?

Yes. While any Indian citizen over 18 years of age can invest in NPS, this tax-saving tool is most beneficial for those in the highest tax bracket. You could avail deductions of up to ₹2 Lakhs depending on the contributions made in a fiscal year.

What is the maximum amount that Section 80CCD (1) permits as a deduction?

For salaried employees, a maximum of 10% of the salary + deferred compensation can be deducted u/s 80CCD (1). Meanwhile, 10% of the total gross income for self-employed individuals can be deducted.

Can I submit an 80CCD (1B) and 80CCD (1) claim simultaneously?

NPS self-contributions qualify for a deduction of up to ₹1.5 Lakhs u/s 80CCD (1). Additionally, Section 80CCD (1B) allows an extra deduction of up to ₹50,000. However, the same contribution can't be claimed under both clauses.

What distinguishes Section 80CCD (1) from Section 80CCD (2)?

Section 80CCD (2) pertains to employer contributions to employee pension accounts. Meanwhile, Section 80CCD (1) addresses employer investments or contributions to these pension schemes.

What NPS Tier II tax benefit applies to investments made in that account?

There is no tax benefit for NPS Tier II accounts. Tax deductions are only applicable to NPS Tier I accounts.

What additional tax benefits does NPS offer beyond those available under Section 80CCD?

NPS tax benefits beyond Section 80CCD encompass:

Full exemption on partial withdrawals from the NPS account
Complete tax exemption on lump sum withdrawals at age 60
40% of the total NPS corpus used for purchasing annuity plans is entirely tax-exempt