National Pension Scheme (NPS): Tax Benefits, Features, and Withdrawals

What is NPS?

NPS is a voluntary contribution scheme that individuals can make regarding their future during their working life. These contributions would accumulate over the years depending on the NPS investment made.

The NPS scheme motivates people to regularly invest a portion in a pension account during their employment. This investment helps you plan your retirement as the subscribers can take out a specific portion of the total amount invested while the remaining amount is offered as a monthly pension. (Know More About NPS)

Initially, NPS covered only the central government employees, but now the Pension Fund Regulatory and Development Authority (NPS scheme regulator ) has made it available to all Indian citizens voluntarily. So, in today’s time, NPS is open to the public, private, and even the unorganized sectors. One has to be a resident or non-resident Indian between the ages of 18 and 70 years to open an NPS account.

NPS is just not a long-term plan for your retirement; it allows you to save taxes at the same time. NPS tax exemption allows you to save taxes within Section 80C or above this limit. NPS tax exemption are available for both salaried and self-employed individuals.

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What are the Objectives of NPS?

• Building a substantial retirement fund is a crucial aspect of financial planning. NPS helps establish this retirement fund by accumulating wealth over time to make the taxpayer’s post-retirement life better.
• This scheme encourages systematic saving during the working years, instilling financial discipline and ensuring savings for the future.
• Looking at the increasing population of senior citizens in the country, the government has introduced NPS as a social security initiative to ensure the well-being of senior citizens.

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Who Should Invest in NPS?

The NPS is an ideal scheme for those individuals who aim to start early retirement planning and prefer low-risk investments. This will ensure a fixed pension amount during retirement, making the life of those retiring from private sector and public sector employment easier. undoubtedly benefit those retiring from private-sector employment.

Engaging in systematic investments like this can significantly improve one's post-retirement lifestyle and help maximize one's 80C deductions.

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National Pension Scheme Eligibility

The eligibility criteria for the National Pension Scheme (NPS) can vary slightly depending on the sector you're applying from (government, corporate, or individual), but here are the general eligibility requirements:

• Age: Individuals aged between 18 years and 65 years can join the NPS. However, the maximum age for joining can be extended to 70 years if the subscriber has been a part of NPS Tier-I account before attaining the age of 60.
• Nationality: Any Indian citizen, whether resident or non-resident, can join the NPS. Additionally, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) are also eligible to join the NPS, subject to certain conditions.
• Types of Accounts: NPS offers two types of accounts:
  • Tier-I Account: This is a mandatory account with restrictions on withdrawals and designed to create a retirement corpus.
  • Tier-II Account: This is a voluntary savings account that provides flexibility in terms of withdrawals.
• Minimum Contribution: The minimum contribution amount required to open an NPS account is usually Rs. 500 for Tier-I and Tier-II accounts, with a minimum contribution of Rs. 1000 per financial year.
• Pension Fund Regulatory and Development Authority (PFRDA): The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Any changes in eligibility criteria or rules are generally notified by PFRDA.
• Employment Status: While NPS is primarily designed for individuals, certain employers also facilitate NPS subscriptions for their employees. In such cases, eligibility might be tied to employment status or terms of the employment.
• KYC Compliance: Like other financial products, KYC (Know Your Customer) compliance is required for opening an NPS account. This involves providing proof of identity, address, and other necessary documents as per the guidelines.

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Types of NPS Account

Two types of accounts are provided to the investors under NPS, Tier I and Tier II.

Tier I account

Once the NPS account is made, the Tier I account starts. NPS Tier I account is fundamental and is meant for retirement. The minimum contribution of Rs. 500 is required to open an NPS Tier I account after which you get a Permanent Retirement Account Number (PRAN).

The investments made under the Tier I account have a locked-in period of 60 years, i.e., the age of 60. The contributions are qualified for NPS tax saving benefits under 80CCD (1) and Section 80CCD (1B) of the Income Tax Act, 1961. Under this section, you can invest up to Rs. 2 lakhs and claim a full deduction, i.e., Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Section 80CCD(1B).<

To open a Tier 1 account, you need proof of identity, address, and age, and fill up the registration form.

Tier II account

NPS Tier II account is an optional account; hence, subscribers need to have a Tier I account to open a Tier II account. Also, subscribers need to deposit a minimum contribution of Rs. 1000 to open the NPS Tier II account. This account has flexible rules for exit. Herein, the contributions don’t qualify for tax exemption.

A detailed difference between Tier I and Tier II is explained below via table:-

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Benefits of National Pension Scheme

• Flexible Contributions: NPS offers flexibility in terms of contributions. Subscribers can contribute regularly during their working life, and they have the option to make lump-sum withdrawals or choose systematic withdrawals during retirement.
• Returns/Interest: Investors in the National Pension System (NPS) allocate a portion of their funds to equities, which may not guarantee returns but historically have offered significantly higher returns compared to traditional tax-saving investments such as the Public Provident Fund (PPF).
  Over the past decade, the NPS has demonstrated an impressive track record, delivering annualized returns ranging from 9% to 12%. One of the notable features of the NPS is its flexibility, allowing investors to switch fund managers if they are dissatisfied with the performance of their current fund.
• Fund options: Under the NPS tax saving scheme, there is a range of investment options, and you can switch from one investment to another or from one fund manager to another. However, the returns are market-linked. You can choose from government bonds, stocks, and other securities. Only 50% is allocated to equity.
• Opening an NPS account: Indian citizens from the age range of 18 to 70 years can open their NPS account. The mandatory Know Your Customer (KYC) norms must be fulfilled. After opening the account, a 12-digit unique number called the Permanent Retirement Account Number or PRAN is provided to the NPS account holder.
• Tax Benefits: Contributions made towards NPS are eligible for tax benefits under Section 80CCD(1) of the Income Tax Act, up to a specified limit. Additionally, contributions made by employers are eligible for tax benefits under Section 80CCD(2).The additional Rs.50,000 deduction on NPS has opened more options to investors for saving tax. There is an increase in total deduction under Section 80C and 80CCD of the Income Tax Act to up to Rs.2 lakh. The limit on 80CCD deduction, including NPS contribution, has also been increased from Rs.1 lakh to Rs.1.5 lakh.
• Choice of Investment Options: NPS offers subscribers a choice of investment options, including equity, corporate bonds, government securities, and alternative investment funds. Subscribers can choose their investment allocation based on their risk appetite and investment goals.
• Professional Fund Management: NPS funds are managed by professional fund managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA). This ensures that the investments are managed efficiently to generate optimal returns for subscribers.
• Portability and Accessibility: NPS accounts are portable across employers and locations, providing flexibility to subscribers who change jobs or relocate. Additionally, subscribers can access their NPS account online and manage their investments conveniently.
• Annuity Options: Upon retirement, subscribers can use a part of their NPS corpus to purchase an annuity, which provides a regular income stream during retirement. NPS offers various annuity options to suit the needs of retirees.
• Low Cost: NPS has relatively low administrative and fund management costs compared to other retirement savings options, making it a cost-effective choice for long-term retirement planning.
• Regulated and Secure: NPS is regulated by the PFRDA, which ensures transparency, accountability, and security of the scheme. The funds are invested in a diversified manner to mitigate risks and safeguard the interests of subscribers.

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National Pension Scheme Tax Benefits

NPS contributions to Tier I accounts are eligible for tax deductions of up to Rs. 2,00,000 per annum via Section 80CCD (1), Section 80CCD (2), and 80CCD (1B). Let us talk about these deductions in detail:-

Tax Benefits for Government Employees

Old Tax Regime

• Employee’s Contribution:
  • Section 80CCD(1):
    • Deduction available for contributions up to 10% of Basic Salary + DA.
    • Combined cap of ₹1.5 lakh (shared with Sections 80C and 80CCC).
• Section 80CCD(1B):
  • Section 80CCD(2):
    • Employer’s contribution deductible up to 14% of Basic Salary + DA.
    • Deduction is over and above the ₹1.5 lakh limit.

New Tax Regime

• Employee’s Contribution:
  • No deductions available under Section 80CCD(1) or Section 80C.
  • Section 80CCD(1B):
    • No deductions available under Section 80CCD(1B)
• Employer’s Contribution:
  • Section 80CCD(2):
    • Deduction up to 14% of Basic Salary + DA.

Tax Benefits for Private Sector Employees

Old Tax Regime

• Employee’s Contribution:
  • Section 80CCD(1):
    • Deduction available for contributions up to 10% of Basic Salary + DA.
    • Combined cap of ₹1.5 lakh (shared with Sections 80C and 80CCC).
  • Section 80CCD(1B):
    • Additional deduction of ₹50,000 over and above the ₹1.5 lakh limit.
• Employer’s Contribution:
  • Section 80CCD(2):
    • Employer’s contribution deductible up to 10% of Basic Salary + DA.
    • Deduction is over and above the ₹1.5 lakh limit.

New Tax Regime (Post-Budget 2024)

• Employee’s Contribution:
  • No deductions available under Section 80CCD(1) or Section 80C.
  • Section 80CCD(1B):
    • No deductions available under Section 80CCD(1B)
• Employer’s Contribution:
  • Budget 2024 Update:
    • Deduction limit increased to 14% of Basic Salary + DA, matching the benefit for government employees.
    • This benefit applies exclusively under the New Tax Regime.

Here’s a comparison of the deduction for NPS contribution before and after budget 2024 -

Budget 2025 Update:-

Zero tax on Rs 13.7 lakh salary

As per the latest announcement, for salaried individuals opting for the new tax regime, income up to Rs. 12,75,000 will be tax-free. Additionally, the Section 87A rebate has been increased to Rs. 60,000, up from the previous threshold of Rs. 25,000 under the new tax regime. This provides significant tax relief to individuals with taxable income up to Rs. 12,75,000 under the new regime. The changes announced in Budget 2025 will be applicable from FY 2025-26 onwards. But do you know, under Section 80CCD(2), up to 14% of an employee's basic salary invested in NPS is tax deductible. Under the old tax regime, the benefit is lower, at 10% of basic pay. An individual earning ₹13.7 lakh a year can reduce annual tax by about ₹96,000 by contributing to the pension scheme. However, this is possible only if the employer offers the NPS benefit as part of cost to company. Employees cannot opt for it on their own. In the case of someone earning ₹13.7 lakh a year, assuming a 50% basic salary component of ₹6.85 lakh, the NPS contribution at 14% would be ₹95,900. Together with the standard deduction of ₹75,000, the entire ₹13.7 lakh will not have any tax implication. To plan your taxes and increase tax savings, contact the tax experts today.

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How to invest in National Pension Scheme to avail the tax benefits?

To avail of the NPS tax saving benefits, first, you need to open an NPS account. The NPS account can be opened both online and offline.

• To go for offline mode, an investor will need to visit a Point of Presence (PoP) appointed by the PFRDA. PoP connects individual investors or corporate entities with the NPS infrastructure. PoP collects documents for KYC requirements and collects investments. The initial investment for Tier I is Rs. 500. For Tier II, it is Rs. 1000. Once the investment is made, the investor will receive PRAN along with the username and password to operate the NPS account.
• To go for online mode, visit the official site and enter the PRAN number and password. Then, enter the captcha and click on the ‘submit’ button. You can now access your E-NPS account. Also, E-NPS accounts can be accessed using your bank's internet banking facility.

Individuals can contact (1800110708) if any issue persists, which is the National Pension helpline.

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What is the Interest Rate for an NPS Account?

NPS Tier 1 Returns:

NPS Tier 2 Returns:

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National Pension Scheme Withdrawal Rules After Retirement (60 years)

• At the time of Maturity
  PFRDA permits NPS Withdrawal, as per which a maximum of 60% can be withdrawn as lumpsum while the remaining 40% is mandatory to be invested in an annuity. This 60% of the corpus is tax-free, while 40% is taxable when the subscriber receives the annuity. Additionally, 100% withdrawal can be made in cases where the corpus amount is less than or equal to five lakh at the time of Superannuation, i.e., attaining the age of 60 years.
• Pre-Mature Exist
  Furthermore, an early withdrawal is allowed, and you can withdraw up to 25% for certain purposes. These purposes can be children’s weddings or higher studies, building/buying a house, or medical treatment of self/family, among others. In the entire tenure, this withdrawal can be made only three times (with a gap of five years). This 25% of the permissible withdrawal is tax-free. 100% withdrawal can be made when the corpus amount is less than or equal to Rs. 2.5 lakh.

NPS stands out as a smart investment choice, offering tax benefits and flexibility for a secure financial future. It is important to plan your taxes correctly so that you can save the maximum taxes. Looking for tax help, consult our tax experts.

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How to login to your National Pension Scheme Account for the first time?

To login to your National Pension Scheme (NPS) account for the first time, you typically need to follow these steps:

• Registration: If you haven't registered for an NPS account yet, you'll need to do so first. This usually involves visiting the official website of the NPS authority and completing the registration process. You may need to provide personal details, identification documents, and other relevant information.
• Generation of PRAN: Once your registration is successful, a Permanent Retirement Account Number (PRAN) will be generated for you. This PRAN serves as your unique identifier for your NPS account.
• Activation of PRAN: After receiving your PRAN, you'll usually receive an activation link or code via email or SMS, depending on the registration process. Follow the instructions provided to activate your PRAN.
• Login Credentials: Once your PRAN is activated, you can log in to your NPS account using the login credentials provided during the registration process. This typically includes your PRAN and a password.
• First-time Login: Upon logging in for the first time, you may be prompted to change your password for security purposes. Follow the instructions provided to set a new password.
• Accessing Account: After setting up your login credentials, you should have access to your NPS account dashboard. From there, you can view your account details, contributions, investment options, and perform other necessary actions related to your pension scheme.

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