NPS not only helps you plan for your retirement, it allows you to save tax at the same time. Whether you are looking for tax saving opportunities within 80C or beyond, NPS offers you both. Yes, that is correct!
Also, no matter whether you are self employed or working with a Corporate, NPS offers exclusive tax benefits over and above 80C limit for both. Further, if your 80C limit is not exhausted, you can still invest in NPS to avail tax benefits under 80C.
NPS Tax benefits under Tier I account
The Tier I account is your primary retirement engine and the main vehicle for tax efficiency. Contributions made here are eligible for deductions under Section 123 read with Schedule XV of the Income-tax Act, 2025, Section 124(1)6 of the Act, and the exclusive Section 124(3)1 of the Income-tax Act, 20252.
The most notable NPS tax benefit here is the additional deduction of ₹50,000 under Section 124(3)1 of the Income-tax Act, 20252. This is available over and above the standard ₹1.5 Lakh limit of Section 123 read with Schedule XV of the Income-tax Act, 2025. By maximising this provision, a subscriber in the 30% tax bracket can effectively save a significant amount in taxes annually. Furthermore, the Tier I account enjoys ‘Exempt-Exempt-Exempt’ (EEE) status on lump sum withdrawals at maturity, as up to 60% of the corpus can be withdrawn tax-free.
NPS Tax benefits under Tier II account
The Tier II account is a voluntary savings facility. It has liquidity but limited tax incentives. For most private sector subscribers, there is no specific NPS tax benefit for contributions to Tier II. It works like a mutual fund where gains are taxed.
However, a specific exception exists for Central Government employees. They can claim deductions under Section 123 read with Schedule XV of the Income-tax Act, 2025 for contributions to their tier 2 NPS account. But a lock-in period of three years should be followed. This brings the benefit for government employees on par with Equity Linked Savings Schemes (ELSS).
Exhausted your Section 123 read with Schedule XV of the Income-tax Act, 2025 limit?
You can invest up to Rs.50,000 and avail tax deductions u/s Section 124(3)1 of the Income-tax Act, 20252 of Income-tax Act, 2025.
This tax benefit is over & above the tax benefits claimed by you for your investments of up to Rs. 1.5 lakh under Section 123 read with Schedule XV of the Income-tax Act, 2025.
You have not exhausted your Section 123 read with Schedule XV of the Income-tax Act, 2025 limit yet?
You can invest up to 20% of your Gross Annual Income. This amount to the extent of 1.5 lakh is eligible for tax deduction u/s Section 124(1)6 of the Act of Income-tax Act, 2025.
Additionally, you can invest up to Rs.50,000 and avail tax deduction u/s Section 124(3)1 of the Income-tax Act, 20252
Exhausted your Section 123 read with Schedule XV of the Income-tax Act, 2025 limit?
You can invest up to Rs.50,000 and avail tax deductions u/s Section 124(3)1 of the Income-tax Act, 20252 of Income Tax Act, 1961.
This tax benefit is over & above the tax benefits claimed by you for your investments of up to Rs. 1.5 lakh under Section 123 read with Schedule XV of the Income-tax Act, 2025.
These benefits are available under the old regime only
Additional Tax Benefit for Salaried Individuals under Corporate NPS
Under Corporate NPS scheme, employees get additional tax benefits on investment routed through their employer. Such investment up to 10% of Salary (Basic + Dearness Allowance) under old tax regime and 14% of Salary(Basic + Dearness Allowance) to the extent of Rs 7.5 lakh is deductible from taxable income u/s Section 124(1)3 of the Act of Income Tax Act, 1961.
Please note:
Beyond annual deductions, the benefits of NPS extend to how your returns and withdrawals are treated by the taxman. The ecosystem is meant to support long-term accumulation.
NPS Tax Benefit On Returns
One of the most attractive features is the tax treatment during the accumulation phase. The returns generated on your corpus—whether from equity or debt—remain tax-free. This compounding growth, unhindered by annual taxation, significantly enhances the final national pension scheme tax benefit.
NPS Tax Benefit on Purchase of Annuity
Upon superannuation, subscribers must use at least 20% of their corpus to purchase an annuity (regular pension). The amount utilised for purchasing this annuity is fully exempt from tax. While the monthly pension income you eventually receive is taxable, the initial investment remains tax-free.
Tax Benefits on Partial Withdrawal from NPS account
The NPS accommodates financial emergencies. Subscribers can make partial withdrawals for specific purposes like higher education, marriage of children, or critical illness treatment.
NPS Tax benefit on lump sum withdrawal
At age 60, the NPS tax benefit allows subscribers to withdraw up to 60% of the total corpus as a tax-free lump sum under Section 10(12A). This makes the NPS highly competitive compared to other savings avenues. Additionally, for smaller corpuses (up to ₹8 Lakh), the entire amount can often be withdrawn tax-free without the mandatory annuity purchase.
Employers also stand to gain. Contributions made by a company towards an employee’s NPS account (up to 10% of salary under old tax regime and up to 14% under new tax regime) can be claimed as a business expense under Section 36(1)(iv)(a) of the Income Tax Act. This reduces the corporate tax liability, creating a win-win scenario for both the organisation and the workforce.
Embracing the Benefits
The NPS tax benefit landscape offers a comprehensive suite of deductions that cater to every type of investor. From the exclusive ₹50,000 deduction to the enhanced limits under the New Tax Regime, the scheme is unrivalled in its ability to reduce tax outgo. Whether you hold a tier 1 NPS account or a government NPS account, strategic planning can result in substantial savings. By understanding the tax benefit of NPS scheme, you not only secure your future but also optimise your present finances.
Disclaimer: Tax laws are subject to change; benefits depend on individual eligibility and the tax regime chosen. Past performance is not indicative of future results; NPS returns are market-linked.
Disclaimer
Income-tax Act, 2025 – corresponding Income-tax Act 1961
Section 123 read with Schedule XV of the Income-tax Act, 2025 – corresponding Section 80C and 80CCE of the Income-tax Act, 1961
Section 124(1)6 of the Act – Corresponding Section 80CCD(1) of the Income-tax Act, 1961
Section 124(3)1 of the Income-tax Act, 20252 – Corresponding Section 80CCD(1B) of the Income-tax Act, 1961
Section 124(1)3 of the Act – Corresponding Section 80CCD(2) of the Income-tax Act, 1961
The maximum benefit depends on your regime. Generally, you can claim ₹1.5 Lakh (Section 123 read with Schedule XV of the Income-tax Act, 2025) + ₹50,000 (Section 124(3)1 of the Income-tax Act, 20252) + Employer Contribution (up to 14% of Basic + DA under Section 124(1)3 of the Act). There is no upper monetary limit on the employer contribution deduction, making it a powerful tool for high earners.
By utilising the full ₹2 Lakh limit (₹1.5L + ₹50k) under the Old Regime, a salaried employee in the 30% tax bracket can save approximately ₹62,400 (including cess). Additional savings are possible through the employer contribution route.
Partially. You can withdraw 60% of the total corpus as a tax-free lump sum. The remaining 40% must be invested in an annuity; while this transfer is tax-free, the pension income generated from it is taxable.
The NPS tax exemption covers several sections: ₹1.5 Lakh under Section 123 read with Schedule XV of the Income-tax Act, 2025, an exclusive ₹50,000 under Section 124(3)1 of the Income-tax Act, 20252, up to 10% under old tax regime and up to 14% of salary for employer contributions under the New Tax Regime.
