Tax Benefits of NPS (National Pension System)

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make better decisions regarding their future through systematic savings during their working life.

NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India. Read more about NPS here.

Tax Benefits of NPS while Investing

Tax Benefits available to Individual

Any individual who is a subscriber of NPS can claim the tax benefit under Sec 80 CCD(1) within the overall ceiling of ₹1.50 Lakhs under Section 80CCE.

Exclusive Tax Benefit available to all NPS Subscribers u/s 80CCD (1B)

An additional deduction for investments up to ₹50,000 in NPS (Tier I account) is available exclusively to NPS Subscribers under Sub-Section 80CCD (1B). This is over and above the deduction of ₹1.50 Lakhs available under Section 80C of the Income Tax Act, 1961.

Tax Benefits of NPS while Withdrawal

Tax Benefits on Partial Withdrawal

Subscribers can partially withdraw from NPS Tier I account before the age of 60 for specified purposes. According to Budget 2017, the amount withdrawn up to 25% of subscriber contributions is exempt from tax.

Tax Benefit on Annuity Purchase

The Amount Invested in the Purchase of an Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.

Tax Benefit on Lump Sum Withdrawal

After the subscriber attains the age of 60, up to 40% of the Total Corpus withdrawn in the Lump sum is exempt from tax.

For Example: If the Total corpus at the age of 60 is ₹15 Lakhs, then 40% of the total corpus i.e. ₹6 Lakhs, and you can withdraw this amount without paying any tax.

So, if you use 40% of the NPS corpus for Lump Sum withdrawal and the remaining 60% for the annuity purchase at the time of retirement, you do not need to pay any tax.

Only the annuity income that you receive in the subsequent years will be subject to Income Tax.

Tax Benefits in Tier II NPS Account

There is no tax benefit on Investment towards a Tier II NPS account.

Disclaimer: This Tax Reckoner for NPS is prepared for educational purposes only don’t consider this as investment advice for NPS. This Tax Reckoner is based on the sources available on the internet like eNPS-NSDL and Nirmal Bang’s Weekly Product Blackboard Report, we tried our best to verify however, we hold no responsibility for the accuracy of the information.