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The Numerous Tax Benefits of National Pension Scheme (NPS)

Jan 24, 2020 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
Tax Benefits of National Pension Scheme

The National Pension Scheme (NPS) is a medium-risk market-linked retirement plan by the Central Indian Government. When it was introduced in 2009, NPS was only for government employees. It was made available to all citizens in 2014.

Being a market-linked instrument, NPS provides funds based on performance. Money can be contributed to a limit of four asset classes in the form of pension funds: corporate bonds, equities, government bonds, and alternative assets. Your returns depend on where you invest, and how your assets perform.

NPS Structure

The National Pension Scheme benefits its users in a variety of ways. There are two types of accounts one can opt for with NPS.

  • Tier-I: Retirement-oriented account. Inflexible. Funds cannot be withdrawn until one reaches 60 years of age. Any contributions are eligible for tax benefits. The minimum yearly contribution for Tier-I is ₹1,000.
  • Tier-II: Savings-oriented account. Flexible. Money can be withdrawn as per one’s needs. No tax benefits, unless one locks in their funds for 3 years. There is no minimum or maximum yearly contribution for Tier-II.

When talking about the tax-benefits under the National Pension Scheme, we are referring to the NPS tax benefits of a Tier-I account, which are conditional for a Tier-II account. Here are the tax benefits you can avail using a retirement-oriented pension plan with NPS.

NPS Tax Benefits

NPS Tax Benefits

NPS offers numerous tax benefits to its users. There are tax benefits on investments, returns, and maturity.

  • NPS Tax Benefits on Investments

Under the Income Tax Act of 1961, the following sections offer tax benefits for those who choose the National Pension Scheme:

Section 80C: NPS policyholders can claim tax benefits on investments. Tax deductions with NPS can be claimed if premiums come under the overall upper limit of ₹1.5 lakhs. 80C is further divided as follows for self-employed individuals and employees.

Section 80 CCD (1): This is for self-employed taxpayers. Over and above the limit of ₹1.5 lakhs and ₹50,000, policyholders can claim tax-reducing benefits on 20% of their gross total income.

Section 80CCD (2): This is not open to self-employed individuals. It for employers contributing to NPS for their employees. Over and above the limit of ₹1.5 lakhs and ₹50,000, policyholders can claim tax-reducing benefits from the employer for up to 10% of the basic salary of the employee.

Section 80CCD (1B): Over and above the ₹1.5 lakhs limit, NPS policyholders (salaried or employed) can claim additional tax deductions with NPS. These deductions may be availed up to a limit of ₹50,000, raising the deductions that can be claimed to an amount of ₹2 lakhs.

As per the terms and conditions, one cannot claim tax-reducing benefits under Section 80CCD if the overall amount exceeds ₹2 lakhs as that is the maximum limit of deduction.

  • NPS Tax Benefits on Returns

Since NPS is a market-linked instrument, the returns depend on the performance of the asset classes. Returns on market products are tax-reduced due to market-related risks. Returns on NPS which are completely tax exempt.

  • NPS Tax Benefits on Maturity

Whichever NPS account you go for; the funds mature when you reach 60 years of age. A maximum of 60% of your accumulated corpus can be withdrawn at maturity. The remainder -40%- needs to be kept aside to be paid out as monthly annuities.

Out of the 60% withdrawn as a lump sum, 40% was tax-exempt while 20% was taxable. Recent approval of the new rules in 2019 have allowed the entire 60% lump sum that is withdrawn to be exempt from Income tax. Hence, the tax deduction with NPS has increased from 40% of the withdrawn amount to 60% of the withdrawn amount.


With the new changes, India’s National Pension Scheme is evolving to become a part of Exempt-Exempt-Exempt (EEE) category of investments, similar to the likes of Public Provident Funds (PPF), life insurance, and Equity-Linked Saving Schemes (ELSS). Today NPS is one of the best retirement plans to opt for to reduce income tax.

Tax deductions with NPS can be claimed on investments up to ₹2 lakhs. Returns on NPS investments are exempt from tax-exempt as returns depend on market performance. Finally, the withdrawn lump sum post-retirement is completely tax-free, as of 2019.

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