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The National Pension System (NPS) has become one of the attractive and reliable retirement planning schemes for Indian citizens, as it offers both long-term security and tax-savings benefits. Whether you are a salaried employee or running your own business, understanding NPS tax benefits, the available deductions, and how it can help you to optimize your investments.
So, here are the key NPS tax benefits.
NPS Tax Benefits Under Section 80 (C).
The key tax benefit of NPS comes under Section 80(C). NPS subscribers can claim a deduction on their contributions. Salaried employees can claim a tax deduction up to ₹1.5 lakh under this section. Moreover, self-employed individuals can claim up to 20% of their gross annual income. This makes NPS a key driver for your tax-saving strategy. For many taxpayers, this is the starting point for claiming the NPS deduction.
Tax Benefits Under Section 80CCD (1B)
This is one of the biggest tax advantages of NPS. It offers an additional tax benefit of ₹ 50,000 under Section 80CCD(1B), which is over and above the 80(C) benefit. So, you can save up to ₹2 lakh in tax per financial year. This section is extremely popular among investors who want to reduce their taxable income further, especially those who have exhausted their 80C limit through other instruments.
Employer Contribution NPS Tax Benefits Under Section 80 CCD (2)
If your employer contributes to your NPS account, you can claim additional tax benefits under Section 80CCD (2). This section allows a deduction on employer contributions up to 10% of salary (Basic + DA) for private-sector employees. For government employees, the limit extends to 14% of salary. Importantly, this deduction is not included within the 80C limit and applies independently, making it extremely tax-efficient. However, the combined employer contributions to EPF, NPS, and superannuation funds are tax-exempt only up to ₹7.5 lakh annually. This makes employer-supported NPS contributions one of the most powerful features of NPS deduction.
Click here to learn how the NPS calculator and retirement planning are co-related.
NPS Deduction in the New Tax Regime
With the introduction of the new tax regime, many investors wonder how NPS and tax benefits work under it. While personal contributions under Section 80CCD (1) are not eligible for deduction in the new regime, two major benefits continue to remain available: the employer contribution deduction under 80CCD (2) and the additional ₹50,000 deduction under 80CCD(1B). This means salaried individuals receiving employer contributions still enjoy significant tax relief even after switching to the new tax structure, making NPS relevant in both regimes.
Tax Treatment on NPS Withdrawal
NPS offers tax benefits not just while investing but also at withdrawal. At retirement, investors can withdraw up to 60% of the total corpus tax-free, allowing for a sizeable lump sum without tax liability. The remaining 40% must be mandatorily used to purchase an annuity, and the annuity income is taxed as per your income slab. This structure ensures tax efficiency at the exit stage while guaranteeing a steady stream of post-retirement income.
Final Thoughts
The National Pension Scheme is designed to encourage disciplined, long-term savings while offering unmatched tax advantages. With multiple layers of deductions, especially the exclusive benefit under 80CCD(1B) and employer-linked savings under 80CCD(2), NPS stands out as one of the most tax-friendly investment options. Understanding these provisions can help you make informed decisions and build a financially secure future while enjoying significant tax savings today.
