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Maximize Your Tax Savings with NPS: A Complete Guide

February 22, 2024

As the end of the financial year approaches and a new one begins, individuals are gearing up to start planning for their goals and aspirations for the upcoming year. For many, planning taxes is a crucial part of this process, especially for those subject to income taxes.

But the question is: Can investing in the National Pension Scheme (NPS) lead to tax savings? The answer is YES! Let’s explore how we can leverage NPS to achieve tax benefits.

What is the National Pension System (NPS)?

NPS is a voluntary investment and retirement savings scheme for salaried people as well as for business owners. It was introduced by the Government of India in 2004, and it is regulated by the PFRDA (Pension Fund Registrations and Development Authority), a government entity that monitors NPS. NPS is a market-linked pension scheme that is managed by fund managers.

There are various aspects related to NPS tax savings, which are explained below.

Tax-saving Under NPS

As you know, there are two types of NPS accounts: Tier 1 and Tier 2. Contributions made to an NPS Tier 1 account are entitled to receive NPS-tax savings deductions, whereas a Tier 2 account does not offer any tax deductions or benefits. To know more about Tier 1 and Tier 2 accounts, read here.

Tax-Saving Benefits in NPS

  • Section 80C: You can receive NPS tax benefits under 80C as the deduction limit is ₹1.5 lakhs. If you want tax benefits under this section, you can invest the entire amount in NPS and claim the deduction.
  • Section 80CCD (1B): This is an additional tax benefit for NPS subscribers. An investor can claim additional tax deductions for his or her investments up to ₹50,000 under this section.
  • Section 80CCD (2): By opting for a corporate NPS contribution, you can contribute up to 10% of your basic pay to NPS which is tax deductible with a limit of ₹5.5 lakh..

However, it is to be noted that, up to 60% of your corpus is exempt from tax, and subsequent income from annuities is taxed under Section 80CCD (3) of the Income Tax Act.


In summary, there are several sections available for tax savings through NPS investments, but proper planning is essential. As this financial year will be ending soon, it will be beneficial for you to gain knowledge on this at the right time to help you save taxes while investing in NPS.