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How Can NPS Help You Save Tax?

Planning retirement? Avail of the benefits of the National Pension System with tax exemptions. Read further to know more.

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Investments generally provide you with the benefits of saving on taxes, and one such investment that helps with the same is retirement plans. These plans help you achieve your future financial goals and live a safe and secure life with your loved ones. One such common investment scheme is the NPS or the National Pension System.

Regardless of the sector you work in - whether private, public, or unorganized, you can invest in the NPS. Having a substantial financial backup is imperative to lead a stress-free life. It not only helps you cover your regular expenses but also looks into emergency situations when the time comes. If you are looking for the above-mentioned points, then NPS would be a good place to begin. This blog will discuss crucial things like what is NPS, its benefits, the factors affecting it, tax deductions, and the terms and conditions attached to it.

What is National Pension System?

National Pension System (NPS) is a pension plan initiated by the government wherein people can invest voluntarily. It is a low-risk and systematic investment process wherein you can put aside a certain amount of your income into this scheme at regular intervals and reap the benefits of guaranteed returns in the future. You can look at the National Pension System calculator online to get an idea about different cover and payments.

There are two types of accounts under NPS, that is, tier 1 and tier 2, and you can open a tier 2 account provided you have a tier 1 account. Furthermore, tier 1 accounts come with withdrawal restrictions that you should be aware of before opening one. It also offers some interesting benefits under Section 80C of the Income Tax Act of 1961, as mentioned below:

Section 80CCD (1)

You can avail of NPS tax benefits of up to ₹1.5 lakhs in one year as per section 80C of the ITA. This is provided you have made your contribution to the Tier 1 account.

Section 80CCD(1B)

In addition to the tax benefit ₹1.5 lakhs mentioned above, you can get an additional exemption of ₹50,000 under this section of the Income Tax Act. This, too, applies to your contributions in the tier 1 account.

Section 80CCD (2)

For the central government, the contributions made towards the tier 1 account are subject to a tax of 14%, while it stands at 10 percent for the others.

Benefits of NPS Through Example

National Pension System (NPS) was launched by the Government of India to provide pension benefits to all citizens, especially those in the unorganized sector who may not have access to formal pension plans. NPS offers numerous benefits to its subscribers, and here’s an example illustrating some of the advantages:

Let us consider the case of Mr. Sharma, a 30-year-old individual working as a software engineer in a private company. He decides to invest in NPS to secure his retirement and avail of its benefits.

  • Tax Benefits

Mr. Sharma is eligible for NPS tax benefits. He can claim a deduction of up to 10% of his salary (Basic + Dearness Allowance) under Section 80CCD(1) within the comprehensive limit of Section 80C (₹1.5 lakhs). Additionally, he can claim an additional deduction of up to ₹50,000 under Section 80CCD(1B) over and above the Section 80C limit. This means Mr. Sharma can potentially save a substantial amount on his tax liability.

  • Employer Contribution

Mr. Sharma’s employer also participates in the NPS scheme. As per NPS rules, the employer contributes 10% of Mr. Sharma’s Basic + Dearness Allowance to his NPS account. This employer contribution is not taxable in the hands of the employee, making it a valuable addition to his retirement savings.

  • Choice of Investment Options

NPS offers two investment options: Active Choice and Auto Choice. Mr. Sharma decides to go with the Active Choice option, where he can choose the allocation of his investments across various asset classes, including Equity, Corporate Bonds, and Government Securities. He can adjust this allocation based on his risk tolerance and financial goals.

  • Flexibility in Contributions

Mr. Sharma has the flexibility to contribute as much as he wants to his NPS account. There is no mandatory monthly contribution; he can contribute based on his financial capacity and retirement goals. He can also make voluntary contributions whenever he has surplus funds.

  • Professional Fund Management

The funds in NPS are managed by professional fund managers appointed by Pension Fund Regulatory and Development Authority (PFRDA). These fund managers have the expertise to manage investments and optimize returns.

  • Low Cost

NPS is known for its low-cost structure. The fund management charges are minimal, which means more of Mr. Sharma’s money is invested, leading to better long-term growth potential.

  • Portability

If Mr. Sharma changes jobs or moves to a different location, his NPS account remains portable. He can continue contributing to the same account or transfer it to a new NPS account seamlessly.

Over the years, Mr. Sharma diligently contributed to his NPS account. As he nears retirement, he sees the accumulated corpus grow significantly due to regular contributions, employer contributions, and the power of compounding. The NPS tax exemption availed during the contribution phase also helped in saving taxes and maximizing his retirement savings.

Factors Affecting National Pension System

Several factors can affect the NPS in India. These factors influence its growth, popularity, and overall effectiveness in providing retirement benefits to individuals. Some of the key factors affecting NPS include:

  • Government Policies and Regulations

The NPS is governed and handled by the Pension Fund Regulatory and Development Authority (PFRDA). Changes in government policies, regulations, and guidelines related to NPS can impact its structure, investment options, tax benefits, and withdrawal rules.

  • Taxation and Incentives

The national pension tax benefits play a significant role in attracting subscribers. Any changes in tax laws, such as alterations in deduction limits, tax treatment of withdrawals, or tax on maturity proceeds, can influence people’s decisions to invest in NPS.

  • Investment Performance

The investment performance of NPS funds directly affects the returns generated for subscribers. The performance is influenced by market conditions, economic factors, and the decisions made by professional fund managers handling the investments.

  • Interest Rates

The interest rates prevailing in the economy can influence the returns generated by the fixed-income component of NPS investments, such as government securities and corporate bonds.

  • Economic Conditions

The overall economic conditions in the country, including inflation rates, GDP growth, and interest rates, can impact the overall financial health of NPS investments.

  • Individual Financial Goals

The financial goals and risk appetite of individuals vary, and these factors play a significant role in determining their preference for NPS as a retirement savings option.

Some Other Terms & Conditions

Here are some other National Pension System details and exemptions under the scheme:

  • If you are under sixty years of age, you can withdraw a certain amount of money from your NPS account as a subscriber.
  • Out of the total amount, if you make a withdrawal of 25%, then it is tax-free.
  • If you use the withdrawn sum of money to make an investment in an annuity plan, then that will be exempted from taxes. However, later, when you start receiving the income from your annuity plan, that will be subject to tax payment.
  • If you make a lump sum withdrawal (40%) from your corpus, it will be tax-free.

NPS offers a host of other benefits as well, which is why so many people invest in it. The accounts are easy to open, and all you need to do is provide the required information and documents. It is a great way to give shape to your post-retirement dreams.

Final Thoughts

National Pension System presents itself as a valuable and versatile retirement savings option for individuals across various sectors. Whether you work in the private, public, or unorganized sector, NPS offers a low-risk and systematic investment process to secure your financial future. It is a journey that requires diligence and prudent decision-making, but the long-term rewards are well worth the effort. So, regardless of your occupation or age, investing in NPS is a wise step toward building a secure and prosperous future for yourself. Start your NPS journey today and embark on the path to a stress-free and fulfilling retirement.

Key Takeaways

  • NPS is a government-backed retirement savings scheme that offers tax benefits, portability, and flexibility.
  • You can avail of tax benefits of up to ₹1.5 lakhs in one year under Section 80C of the ITA for your contributions to the Tier 1 account.
  • The funds in NPS are managed by professional fund managers appointed by Pension Fund Regulatory and Development Authority (PFRDA).
  • If you are under sixty years of age, you can withdraw a certain amount of money from your NPS account as a subscriber.



Who are eligible for the National Pension System?

Any Indian citizen, whether resident or non-resident, can open an NPS account. You must be between the ages of 18 and 60 to open an NPS account.


How much pension will I get from NPS?

The amount of pension you will get from NPS depends on a number of factors, including your contribution amount, your age at retirement, and the annuity option you choose. The annuity rate is also a factor that determines the amount of pension you will get.


Can an NRI open an NPS account?

Yes, an NRI can open an NPS account. However, there are some restrictions on NRI NPS accounts. For example, NRIs cannot contribute to the Public Provident Fund (PPF) option under NPS.


What are the types of annuity choices available to NPS subscribers?

There are four types of annuities available to NPS subscribers: life annuity, life annuity with return of premium, annuity with guaranteed minimum income, and annuity with reversionary benefit.

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- A Consumer Education Initiative series by Kotak Life