National Pension Scheme (NPS) - Tax Benefits

National Pension Scheme (NPS) - Tax Benefits

30 October, 2023

National Pension Scheme (NPS) is a market-linked voluntary retirement scheme under the purview of the Pension Fund Regulatory and Development Authority (PFRDA). It encourages you to make regular contributions, inculcating the habit of saving for retirement. The article offers an overview of NPS investment and NPS tax benefit.

About NPS

A professional fund manager manages NPS investment and invests in diverse instruments such as Equities, Government Bonds, Corporate Debentures, Bills, and more. You must be 18 to 70 years old and fulfil the Know Your Customer (KYC) requirement to open an NPS Account.

You can set the Equity exposure between 0% to 75%. You can build a significant financial corpus to enjoy and secure your retirement life. There are two types of NPS Accounts – Tier 1 and Tier 2. Tier 1 account is the primary account. It is locked in until retirement and withdrawals from it are restricted. However, you can make partial withdrawals under special circumstances. The Tier 2 account is a voluntary account which allows anytime withdrawals. Note, you can open a Teir 2 only when you hold a Tier 1 account.

You will receive a Permanent Retirement Account Number (PRAN) with your NPS application. The Central Recordkeeping Agency (CRA) will send the PRAN card to your correspondence address.

On maturity, at least 40% of the corpus amount is used to purchase annuity, creating a regular source of income to meet your everyday expenses during retirement. You can withdraw the rest of the amount as lumpsum withdrawal. NPS is tax-saving as well.

An overview of National Pension Scheme tax benefit

Besides being an incredible retirement saving scheme, NPS is also tax efficient. As mentioned, there are two NPS Accounts – Tier 1 and Tier 2. You can claim tax benefits only on the Tier 1 Account. Following is a detailed explanation of NPS tax benefits:

  • Tax benefit under Section 80 C

    • You can claim a tax benefit under Section 80C on self-contributions of up to ₹1.5 lakh to an NPS Account.

    • You can claim a tax benefit under Section 80 CCD (1B) on additional self-contribution worth ₹50,000 to an NPS Account.

  • Employee tax benefit on self-contributions

    As an employee, you can avail a tax deduction of up to 10% of your salary (Basic + Daily Allowance) under Section 80 CCD (1), within the ceiling limit of ₹ 1.5lakh under Section 80 CCE.

  • Employer tax benefit on NPS contributions

    An employer is eligible for a tax deduction of up to 10% of salary (Basic + Daily Allowance), it is 14% if the contributor is the Central Government under Section 80 CCD (2), over the ₹ 1.5 lakh limit of Section 80 CCE.

  • Tax benefits for corporates/employers

    An employer contributing to an employee’s NPS Account can claim a tax deduction of up to 10% of the salary (Basic + daily allowance). The tax deduction can be claimed as a “Business Cost” from the Profit and Loss account under Section 36 (1)(iv)(a).

  • Tax benefits for self-employed NPS subscribers

    As a self-employed individual contributing to NPS, you can claim an NPS tax benefit of up to 20% of your gross income under Section 80 CCD (1) and tax deduction of up to ₹50,000 under section 80CCD (1B) within the ₹1.5 lakh cap limit of Section 80 CCE.

  • NPS Tax benefit on purchase of annuity

    You are eligible for tax exemption under Section 80 CCD (5) on purchasing an annuity upon attaining 60 years of age or superannuation. Note that the income received from an annuity is subject to taxation under Section 80 CCD (3).

  • Tax benefits on partial withdrawal from the NPS account

    You can claim a tax deduction on a partial withdrawal worth 25% of the self contribution, subject to the terms and conditions mentioned in Section 10 (12B). Partial withdrawals allow you to meet significant expenses such as children’s higher education, marriage, or medical emergencies.

  • Tax benefit on lump sum withdrawal

    Lumpsum withdrawals of 60% of accumulated pension wealth is eligible for tax exemption upon attaining the age of 60 or superannuation under section 10(12A)

Tier 2 & taxation

Tier 2 NPS Account is a voluntary account. You receive no tax benefits on your contributions. Also, gains arising out of your NPS investments in tier 2 Accounts are not eligible for tax rebates. Tax will be applicable per your tax slab.

Other Benefits of NPS Account

Explained below are the various benefits of NPS Account:

  • Online account opening

    Click here to open your NPS account online through HDFC Bank website. You have an option to choose the CRA of your choice.

  • Low cost

    NPS is a low-cost pension scheme with nominal administrative and fund management charges. You can find the break-up of charges here.

  • Flexible investment options

    NPS offers two types of investment options, active choice and auto choice. You can select the one you prefer and also choose asset classes.

  • Easy management

    You can make contributions to NPS and manage your account through eNPS. Plus, if you are a government employee and you have shifted sectors, your NPS Account also gets shifted.

Open your NPS Account via HDFC Bank. Click here to know more.

​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

Click here to know more.

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