Home Finance Understanding the Various Tax Benefits Offered By National Pension Scheme (NPS)

Understanding the Various Tax Benefits Offered By National Pension Scheme (NPS)

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You work hard for a significant part of your life. Why do we strive so hard? While there are several reasons that are not personal behind it, one of the most crucial factors driving it is to have a secure and steady retirement life.

If planned well, retirement is one of the most delightful parts of our lives when we finally give ourselves time and create memories with family, friends, and, more importantly, things we love to do. But you will require impeccable planning to achieve it all.

Having a well-curated National Pension Scheme (NPS) would help you ensure these dreams become a reality. To propel the growth of the NPS scheme, the Government of India has allowed a host of tax benefits, too.

This article will help you decode the several NPS tax benefits you are eligible for and avail those with ease.

Tax Benefits Offered by National Pension Scheme (NPS)

NPS was launched back in 2004 for government employees but was made available to the public only in 2004. It is PFRDA (Pension Fund Regulatory and Development Authority) regulated and is a marked-linked product, i.e., its returns are dependent on the market and the fund you choose.

National Pension Scheme is open for all Indian individuals, whether salaried or self-employed, aged between 18 and 65 years. Here are the tax benefits:

On the Periodic Investments

  • Under Section 80C

Section 80C offers deduction up to ₹ 1.5 lakh from your taxable income for assesses who have made specified investments or expenses. NPS is one of the listed items under this Chapter VIA section, and you can avail a 100% deduction of up to ₹ 1.5 lakh in any financial year.

  • Under 80CCD (1B)

NPS tax benefits under Section 80CCD (1B) are available over and above any benefits available under Section 80C. Under this section, you can claim a deduction of up to ₹ 50,000 against your investments in NPS.

  • Under 80CCD (2)

This section caters to salaried individuals. Here, you can avail deductions on any amount contributed by the employer. The rate differs for government and private employees.

The lowest of the following is eligible for deduction –

  • Actual NPS contributed by the employer
  • 10% of Salary (Basic + Dearness Allowance) (14% for government employees)
  • Gross Total Income

On Returns and Maturity

NPS tax exemption is not limited to investments only but is also available when the scheme matures. It falls under the ‘EEE’ or exempt-exempt-exempt category. It means that you are not required to pay tax on returns generated by it, which are paid to you in a lump sum or a pension.

NOTE – These deductions are available only for Tier I investments. If you are investing any amount voluntarily under Tier II, its returns are taxable and work like any other savings account in a bank.


Retirement planning can be a tricky affair unless you know the nuances. You can subscribe for National Pension System and apply for it matches your risk profile and investment outlook. However, remember that it would be worth investing only if the returns exceed the compounded inflation for the period.

On the tax side of things, NPS can help you bring down your net taxable income significantly. Therefore, if you are looking for an investment that acts as a hedge for your retirement and tax outflow, the National Pension Scheme is one of the good choices you have.

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