NPS: What are the tax benefits of investing in National Pension Scheme? Read to know about them

The National Pension System (NPS), also known as the National Pension Scheme, was launched in 2004 and was later opened to the public in 2009. A voluntary contribution based national pension plan, NPS mainly intends to help individuals make long-term savings for their post-retirement financial needs. It is regulated by the Pension Fund Regulatory Development Authority (PFRDA)

The employees from the public, private, and even the unorganised sectors can make investments in pension accounts under NPS. Any individual in the age groups of 18 to 60 years can open an account under NPS to build a retirement corpus.

Apart from the savings benefits, NPS investments also offer tax benefits.

Tax Benefits under NPS

From receiving tax incentives to exemptions under various sections of the Income Tax Act, investors registered under the National Pension Scheme are eligible for a range of tax benefits. 

While NPS offers two types of accounts for investors including Tier I and Tier II, both types of investments come with tax benefits. While Tier I accounts are mandatory for all NPS investors and they come with some major tax saving benefits, Tier II accounts are voluntary. 

Tax benefits are available on annual contributions made to NPS accounts as per Sections 80CCD (1), 80CCD (2), and 80CCD (1B) of Income Tax Act, 1961.

Employees can claim tax deduction for contributions of up to 10 per cent of their salary and dearness allowance in the previous year under Section 80 CCD (1) while for self-employed people the limit is 20 per cent. However, the total deduction amount has been capped at Rs 1,50,000.

Both government and privately-employed salaried individuals can claim up to 10 per cent of the contributions of their employer under Section 80CCD (2). 

Investors can claim deductions for an additional Rs 50,000 contribution under Section 80CCD (1B). 

Other tax benefits 

Apart from the mentioned tax deductions, investors can also claim a few other benefits in various cases including partial withdrawal, on returns and on maturity. 

1. Investors can make a partial withdrawal after three years of investment. They can withdraw up to 25 per cent from their NPS Tier I account. This withdrawal amount is exempted from taxes. 

2. An investor is eligible for tax exemption on purchase of annuity upon attaining the age of 60.

3. Upon maturity, while an investor can withdraw 60 per cent lump sum amount of his accumulated corpus and purchase annuities with the remaining 40 per cent, both of these are exempted from taxes.