NPS Tax Benefit - National Pension Scheme

Income Tax Benefit with the NPS Scheme

Secure your retirement with the NPS tax-saving scheme. Visit the article to learn how to avail the tax benefits of Tier-1 and Tier-2 NPS accounts.

National Pension Scheme (NPS) was launched by the Government of India in 2009 to provide a reliable pension plan to all citizens. NPS is managed and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS can help you with retirement planning and income tax saving of up to ₹2,00,000.

Features of the NPS Tax-Benefit Scheme

Features	Tier-1 Account	Tier-2 Account
Eligibility	It is mandatory to open a Tier-1 account.	It is optional to open a Tier-2 account. It can be opened if a Tier-1 account is opened.
Tax Benefits	NPS tax benefits of ₹2,00,000 can be availed under Sections 80C and 80CCD.	NPS Tier-2 tax benefits of ₹1,50,000 can be availed by only central government employees.
Minimum Registration Amount	₹500	₹1000
Lock-in Period	Funds can be withdrawn only after attaining the age of 60 years.	Funds can be withdrawn anytime.
On Maturity	Sixty per cent of the corpus can be withdrawn, and an annuity needs to be purchased with the rest forty per cent.	The full or partial corpus can be withdrawn anytime.

NPS Scheme: Income Tax Benefit

Investing in NPS is a wise decision to take as you can avail many income tax benefits that come with it. It serves the dual purpose of retirement planning and income tax saving. Let us now discuss NPS tax benefits in detail.

NPS Tax Benefits for Tier-1 Accounts

The following table shows the difference in NPS scheme income tax benefits of Tier-1 accounts for salaried and self-employed individuals.

Income Tax Act Section	Salaried individuals	Self-employed individuals
80 CCD (1)	· Contribution from employee’s salary · 10% of salary (basic + DA) · Within the overall ceiling limit of ₹1.5 lac under Section 80 CCE	· Tax deduction of up to 20% of gross income · Within the overall ceiling limit of ₹1.5 lac under Section 80 CCE
80 CCD (2)	· Contribution from the employer · 10% of salary (basic + DA) · Over and above the ceiling of ₹1.5 lac under Section 80CCE	Not Applicable
80 CCD 1(B)	· Voluntary contribution by employees in only Tier-1 · A maximum ₹50,000 can be claimed for tax deduction over and above the ceiling of ₹1,50,000 under Section 80 CCE.	· A maximum of ₹50,000 can be claimed for tax deduction over and above the ceiling of ₹1,50,000 under Section 80 CCE.

NPS Tax Benefits for Tier-2 Accounts

If you are a central government employee, you can invest a maximum of ₹1,50,000 in NPS Tier-2. You can claim tax benefits under Section 80C of the Income Tax Act.
This account is called NPS Tier-2 tax-saver account.
It has a lock-in period of three years, after which you can withdraw the maturity amount.
You cannot avail of NPS Tier-2 tax benefits if you do not work with the central government.

NPS Tax Benefits on Withdrawal

You can also take advantage of NPS tax benefits on the withdrawal amount in your Tier-1 account. If you have a Tier-2 account, the withdrawal amount is taxable as per your income tax slab.

All possible scenarios for NPS tax benefits in Tier-1 accounts are listed here:

Partial Withdrawal

NPS allows a maximum of three withdrawals in the entire tenure for Tier-1 accounts. Each withdrawal can be up to 25% of your contribution (not including your employer’s contribution). This withdrawal amount is completely tax-free.

Maturity

Funds in your Tier-1 accounts are eligible for full withdrawal when you reach the age of 60 years or superannuation. You can withdraw 60% of the maturity amount in lump sum money, which will be tax-free.

Purchase of Annuity

You must buy an annuity plan with the remaining 40% of the maturity amount in your Tier-1 NPS account. This amount will be eligible for tax exemption under Section 80CCD (5). The maximum ceiling under this section is ₹ 2,00,000.

Advantage of EEE in NPS

We all want to invest in instruments that offer high returns and help save taxes. Such investments fall under the EEE category. EEE denotes exempt-exempt-exempt. This means

the contribution amount is exempt from tax deduction;
the returns or the profits earned on the investment are exempt from tax deduction;
the maturity amount is exempt from tax deduction.

Earlier, the NPS tax-saving scheme came under a mix of EEE and EET statuses because only 40% out of the 60% lump sum withdrawal amount was tax-free. However, the 2019 Union Budget announced that the full 60% of the lump sum would be tax-free. This put NPS in the elite category of EEE.

Eligibility to Open an NPS Account

You should be between 18 and 65 years of age.
You have to open NPS Tier -1 account before opening a Tier-2 account.
You need to submit KYC documents: identity proof, address proof (Aadhaar/Passport/Driving License/Voter’s ID), and a passport-size photograph.

How to Open an NPS Account

NPS accounts are regulated by PFRDA. PFDRA has appointed several Point of Presence-Service Providers (POP-SP) to open and manage NPS accounts. You can visit any designated POP-SP with the required documents and open your NPS tax-saving account.

You can also open e-NPS through online mode. It provides you with the ease of opening an NPS account instantly without visiting any POP-SP. After the NPS account is opened, you will receive your Permanent Retirement Account Number (PRAN). You will also receive a password to operate your account online.

NPS Contribution Limit

At present, there is no upper limit on the maximum amount and number of contributions in both NPS Tier-1 and Tier-2 accounts.

However, there is a limit on tax saving through NPS. The limits are as under:

Income Tax Act Section	Maximum Eligible NPS Deduction Section
80C	₹1,50,000
80 CCD (1B)	₹50,000

Conclusion

NPS is the best scheme to invest in as it will cater to your retirement savings and give maximum tax benefits. You can get NPS tax benefits of ₹ 2,00,000 under Section 80C of the Income Tax Act. As a working employee, you can also gain the NPS employer contribution tax benefit.

Open your NPS tax-saving account through Angel One. Explore our website and mobile app and get free tips on availing of NPS tax benefits and investing smartly.

Is NPS tax-free on maturity?

Yes, you can take a lump sum of 60% of the maturity amount. This amount is entirely tax-free.

Can I claim NPS tax benefits in both Tier-1 and Tier-2 accounts?

No. In a Tier-1 account, you can claim a maximum of ₹2,00,000 as the NPS scheme income tax benefit. And you can claim NPS Tier-2 tax benefits only if you are a central government employee.

Is the annuity amount tax-free?

Yes, the amount you invest in buying an annuity comes under the NPS tax benefit. It is in accordance with Section 80CCD (5) of the Income Tax Act.

How much tax savings can I do with NPS?

The NPS scheme offers income tax benefits. You can save an additional amount of Rs 50,000 above the ceiling limit of Rs 1.5 lac u/s 80C.

Can I exit from NPS tier-1 before 60 years of age?

If your total corpus is below Rs 2.5 lac, you may withdraw the full amount and exit the NPS tax-saving scheme.
However, above Rs 2.5 lac, you will have to purchase an annuity of 80% of the corpus. You can withdraw the rest as a lump sum.