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NPS Account Tax Exemptions & Benefits: Explained

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April 4, 2023


What’s Inside

When it comes to planning for your financial future, NPS can be a valuable tool. Not only does it offer a secure way to build a retirement fund, but it also comes with NPS account exemptions and benefits that can lighten your tax burden.

What is NPS?

NPS is a government-initiated voluntary retirement savings scheme designed to provide financial security during your post-retirement years. It is open to all citizens between the ages of 18 and 65 and offers two account options: Tier-I and Tier-II accounts.

NPS Tax Benefits

1. Exemption under Section 80C

Contributions made towards your NPS Tier-I account are eligible for a tax deduction under Section 80C. You can claim up to ₹1.5 lakh annually as a deduction. This helps in reducing your taxable income and, consequently, the amount of tax you need to pay.

2. Additional Deduction under Section 80CCD(1B)

On top of the Section 80C benefit, an exclusive deduction of up to ₹50,000  is available under Section 80CCD(1B). This deduction is specifically for NPS contributions, making it even more attractive for those looking to maximise their tax savings.

3. Employer Contribution

If you're employed and your employer contributes to your NPS account, that contribution is not counted as a part of your taxable income. This can significantly reduce your taxable income, leading to lower tax liability.

4. Tax-Free Withdrawals

When you retire, you can withdraw a portion of your NPS corpus as a lump sum. This lump sum withdrawal is tax-free up to 60% of the total corpus. The remaining 40% must be used to purchase an annuity, which provides a regular pension and is also eligible for tax benefits.

NPS Tax Treatment at Maturity

While NPS advantages help in tax-saving during the accumulation phase, it's important to understand the tax treatment at the time of maturity:

1. Lump Sum Withdrawal

When you decide to withdraw your NPS corpus at maturity, 60% of the corpus is tax-free. The remaining 40% used to purchase the annuity is also tax-exempt at the time of purchase, but the pension received from the annuity is taxed as per your applicable tax slab.

2. Annuity Payout

The periodic pension received from the annuity is considered a part of your income and is taxed accordingly. However, since this income is usually received during retirement, when your overall income might be lower, the tax impact could be relatively manageable.

Wrapping Up

NPS not only offers a reliable way to secure your financial future but also comes with a range of tax benefits. From deductions on contributions under Section 80C and 80CCD(1B) to tax-free withdrawals and favourable tax treatment during retirement, tax saving with NPS proves to be a smart investment for both retirement planning and tax optimization.

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Frequently Asked Questions (FAQs)

1. What is an NPS account, and how does it offer tax benefits?

NPS is an Indian retirement savings scheme with tax benefits. Contributions can be deducted from taxable income under Section 80C, and up to ₹50,000 under Section 80CCD(1B).

2. Are the contributions made to an NPS account eligible for tax deductions?

Indeed, your NPS contributions qualify for tax deductions. In India, under Section 80C, the invested NPS amount is deductible from taxable income, up to a limit. Moreover, Section 80CCD(1B) provides a ₹50,000 tax benefit exclusively for NPS contributions.

3. What are the tax benefits associated with the withdrawals from an NPS account?

Upon retirement in India, NPS withdrawals offer tax benefits. Up to 60% of the corpus is tax-exempt, while the remaining 40% is for purchasing an annuity, ensuring a steady pension income.

4. Can I avail additional tax benefits if I invest in an NPS account beyond the basic limit?

Investing in an NPS account beyond the basic limit allows you to avail of additional tax benefits. In India, while the basic deduction under Section 80C covers your initial NPS contributions, you can further benefit from an exclusive deduction of up to Rs 50,000 under Section 80CCD(1B) for contributions made beyond the basic limit.

5. Do the tax exemptions and benefits of an NPS account differ for salaried individuals and self-employed individuals?

In India, both groups get tax benefits under Section 80CCD(1) for NPS contributions. Salaried individuals gain from employer's NPS contribution under Section 80CCD(2). Self-employed individuals have a higher deduction limit under Section 80CCD(1) than salaried ones.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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