NPS Tax Benefits

Updated: 26-12-2025 13:21:26 PM

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NPS or National Pension System is a market-linked savings scheme and one of the most popular retirement solutions in India. Therefore, NPS helps you build a substantial corpus for your retirement, earn market-linked returns and also offers various tax benefits/NPS tax benefits. Read on to have a deeper insight into NPS Tier 1 and Tier 2 tax benefits.

Tax Benefits to Employees on Self-Contribution and Employer’s Contribution

Given below are NPS scheme benefits in income tax for salaried employees:

• If you are employed and a part of the NPS scheme, then your NPS contributions up to Rs. 1.5 Lakh are tax deductible under Section 80 CCD (1) and (2). Whether you are part of NPS (Central Government), NPS (State Government) or NPS (Corporate), this limit includes both employer and employee contributions.

For example, let us assume your salary is Rs. 50,000 per month. Your employer contributes Rs. 5,000 per month and hence Rs. 60,000 per annum. The employer also deducts another Rs. 5,000 per month (Rs. 60,000 per annum) from your salary for NPS. Both these amounts of Rs. 60,000 each will be eligible for tax deduction under Section 80 CCD (1) and Section 80 CCD (2) of the Income Tax Act, 1961 respectively.

• Moreover, NPS contributions up to Rs. 50,000 are also tax deductible under Section 80 CCD (1B). This amount is over and above the Rs. 1.5 Lakh deduction under Section 80 CCD (1) and (2).

NPS Tax Benefits for Self-employed

Here are key NPS scheme benefits in income tax for self-employed individuals:

• If you are self-employed or work in the unorganized sector and are contributing to NPS, you are eligible to get a tax deduction up to 20 % of your gross income under section 80 CCD (1) within the overall ceiling of Rs. 1.50 Lakh under Section 80 CCE.

For example, if your annual income is Rs. 6 Lakh and you contribute Rs. 1 Lakh out of this to NPS. The entire contribution of Rs. 1 Lakh is tax deductible under Section 80 C.

• Additionally, NPS contributions up to Rs.  50,000 are also tax deductible under Section 80 CCD (1B). This is over and above the Rs. 1.5 Lakh deduction under Section 80 CCD (1) and (2).

For example, assume that you are self-employed with an annual income of Rs. 10 Lakh and have contributed Rs. 2 Lakh to NPS. Out of this Rs. 1.5 Lakh will be tax deductible under Section 80 CCD (1) and (2) and another Rs. 50,000 will be tax deductible under Section 80 CCD (1B). Hence your entire Rs. 2 Lakh will be tax deductible. 

NPS Tax Benefit on Interest/Returns

The NPS gives market linked returns rather than fixed interest. These returns are completely tax-free as long as you do not withdraw your money from the NPS account. They are tax-free in both NPS Tier 1 and Tier 2 accounts.

For example, if you invest Rs. 1 Lakh in an NPS equity fund and it grows to Rs. 1.5 Lakh. You then exit this fund and move your money to an NPS debt fund. You have crystallized a gain of Rs. 50,000 but you do not have to pay tax on this because the money is held within the NPS account.

Also Read NPS Returns: Calculation and Interest Rates

NPS Tax Benefit on Partial Withdrawals

You can make partial withdrawals for specified purposes up to 25% of your contributions. Such partial withdrawals can only be made up to three times in your entire tenure in the NPS. These partial withdrawals are completely tax-free.

Conditions for Partial Withdrawal under NPS

Partial withdrawals under NPS can be done on account of the following reasons:

1. Higher education of children
2. Marriage of children
3. Purchase or construction of a residential house or flat either in your own name or jointly with your spouse. However, if you already own or jointly own a house or flat other than ancestral property, this will not be permitted.
4. Treatment of any of the illnesses mentioned below: (The patient can be the subscriber, his spouse, children or dependent parents)

• Cancer
• Kidney failure
• Preliminary pulmonary arterial hypertension
• Multiple sclerosis
• Major organ transplant
• Coronary artery bypass graft
• Aorta graft surgery
• Heart valve surgery
• Stroke
• Myocardial infarction
• Coma
• Total blindness
• Paralysis
• Accident of a serious/life-threatening nature
• Any other critical illness of a life-threatening nature specified by the PFRDA from time to time

NPS Tax Benefit on Maturity Amount

The NPS Tier 1 account matures at the age of 60, although you can extend this to the age of 70. On maturity, you can withdraw up to 40% of your corpus tax-free. You must use another 40% of your corpus to buy an annuity. This 40% amount is not taxable while buying an annuity but the annuity itself will be taxable. The balance 20% can either be withdrawn by paying tax at your slab rate or can also be used to buy an annuity.

For example, assume that you have an NPS corpus of Rs. 1 Crore.

• Out of this, you can withdraw up to Rs. 40 Lakh tax-free.
• You can use another Rs. 40 Lakh to buy an annuity (a monthly pension) from one of the insurance companies empanelled by the PFRDA. This second Rs. 40 Lakh is not taxable at the time of annuity purchase. However, the annuity itself is taxable at your slab rate. For example, assume that you get an annuity of Rs. 3.2 Lakh per year until your death from the Rs. 40 Lakh purchase price. This annual payment of Rs. 3.2 Lakh will be taxable at your slab rate. This payment will be taxable in the respective years of payment and not in the year of annuity purchase.
• You withdraw the balance Rs. 20 Lakh. This will be taxable at your slab rate in the year of withdrawal. For example, if you are in the 30% tax slab, a tax of Rs. 6 Lakh will be payable on this withdrawal.

NPS Tier 2 does not have any lock-in or specific maturity period. You can withdraw your money from it at any time. This money is taxable at your slab rate.

NPS Benefits after Retirement

You can withdraw up to 40% of your corpus tax-free after the age of 60. You must use another 40% to buy an annuity (monthly pension). You will get this pension after retirement. You can either withdraw the balance 20% after paying tax and invest the same for your retirement income or you can use it as well to buy an annuity (monthly pension). Here is an example:

• You have an NPS corpus of Rs. 1 crore on retirement.
• You withdraw Rs. 40 Lakh out of this, tax-free.
• You use another Rs. 40 Lakh to get a monthly pension of Rs. 25,000.
• You withdraw the balance Rs. 20 Lakh, out of which you pay a tax of Rs.6 Lakh. You invest the balance Rs. 14 Lakh in Fixed Deposit and get interest of Rs. 9,000 per month on the same

Thus your NPS corpus has given you a lump sum of Rs. 40 Lakh and a monthly pension of Rs. 34,000 after retirement.

Alternatively, if you are still working, you can defer your pension till the age of 70 and give your corpus a longer time to grow. Out of this, you can only defer the annuity component (40%) by three years – hence till the age of 63. However, you can defer the remaining 60% amount and keep contributing to the same and availing tax benefits on your contributions.

NPS Benefits after Death

Your nominees will receive your entire NPS corpus if the same has not matured (in case of the beneficiary’s death before the age of 60). They will also get the entire NPS corpus if you have deferred the NPS after the age of 60. Remember that you can defer (postpone) taking your NPS money till the age of 70. If you have withdrawn money from the NPS, the amount withdrawn will be passed on to your heirs just like all your other assets/money.

The only exception to this rule is the annuity. A simple NPS annuity will be forfeited to the insurance company issuing the annuity on your death. For example, if you have purchased a simple annuity at the age of 60 and you pass away at the age of 68, your nominees will not get the annuity. An annuity which pays you and your spouse after death, will only be paid to your spouse on your death for the rest of his/her life. Finally, an annuity with a return of purchase price will pay your nominees the annuity purchase price. For example, assume that you have used Rs. 40 Lakh at the age of 60 to buy an annuity of Rs. 3.2 Lakh per year. You pass away at the age of 70 after getting the annual payment of Rs. 3.2 Lakh per year, for 10 years. Then Rs. 40 Lakh will be returned to your nominees.

Moreover, India does not have any inheritance tax and hence, the NPS corpus is not taxed when it is paid to the nominees.

FAQs

Q. What would be the investment proof to avail tax benefit under NPS?

Ans. The Transaction Statement can be submitted by the subscriber as an investment proof. Alternatively, the subscriber from “All Citizens of India” can also download the receipt of voluntary contribution made in Tier I account for the relevant financial year from after logging in to the NPS. It can be downloaded from the sub menu “Statement of Voluntary Contribution under National Pension System (NPS)” available under main menu “View” in NPS account log-in.

Q. What are the NPS tax benefits available on investments made under Tier 2 account?

Ans. There are no tax benefits available on investments made towards NPS Tier 2 accounts.

Q. What tax benefits are available on annuity purchase?

Ans. The amount is fully exempt from tax. However, the annuity income that you will get in the subsequent years will be subjected to income tax as per your taxable income slab.

Q. Can I invest Rs. 20 Lakh in an NPS Tier 1 account?

Ans. Yes, there is no maximum limit on the amount of money that you can invest in your NPS Tier 1 account. However, you can only claim tax deduction up to Rs. 2 lakh in a financial year, that is, Rs. 1.5 Lakh deduction under Section 80 CCD (1) and (2) and Rs.50,000 under Section 80 CCD (1B).

Q. Is the tax benefit different for government sector and private sector employees?

Ans. No, all salaried individuals are entitled to receive the same tax benefits when they subscribe to NPS.