National Pension Scheme Tax Benefits: Eligibility, Sections & Limit Explained

Key Takeaways

• The National Pension System (NPS) offers tax savings of up to ₹2,00,000 per year.
   
• At the time of retirement, 60% of the NPS corpus can be withdrawn tax-free.
   
• Contributions made by employers to an employee’s NPS account provide additional tax benefits.
   
• FinTech platforms are making it easier, faster, and more convenient to invest in NPS through fully digital processes.

BONUS: SUBSCRIBERS CAN CLAIM NPS TAX DEDUCTIONS OF UP TO ₹2,00,000 PER YEAR, ₹1,50,000 UNDER SECTION 80C AND AN ADDITIONAL ₹50,000 UNDER SECTION 80CCD(1B).

The National Pension Scheme (NPS) is a voluntary, government-supported retirement savings scheme offering flexible contributions, market-linked returns, and tax benefits.

Riya, a 28-year-old software developer in Noida, begins investing ₹5,000 per month in the National Pension Scheme (NPS). Over 32 years, she has contributed a total of ₹19,20,000. With average market returns of 9%, her retirement fund grows close to ₹1,00,00,000. 

At age 60, Riya withdraws 60% (₹60,00,000) completely tax-free and invests the remaining 40% (₹40,00,000) into an annuity plan. This gives her a monthly pension of around ₹18,000, taxable as per her slab. Apart from her retirement corpus, she also saves up to ₹2,00,000 every year in taxes during her career.

In this blog, we will explore NPS eligibility, tax benefits, withdrawal rules, and recent updates in simple words.

What is the National Pension Scheme (NPS)?

The National Pension Scheme is a retirement-focused investment regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed to encourage long-term savings with flexible contributions.

Priya, a 30-year-old marketing professional in Bengaluru, invests ₹5,000 monthly. Over 30 years, she has contributed ₹18,00,000. With 9% returns, her savings grow to nearly ₹88,00,000. At retirement, she withdraws 60% (₹52,80,000) tax-free, while 40% (₹35,20,000) funds her monthly pension of ₹17,000.

To understand NPS clearly, let’s look at its main features in a structured way.
 

The table shows that NPS is flexible, tax-saving, and allows retirement security across different age groups.

How Does NPS Work?

NPS works by dividing investments into Tier I (retirement savings, compulsory lock-in) and Tier II (voluntary, withdrawable anytime).

For Example, Ravi, a 35-year-old engineer in Pune, invests ₹4,000 monthly for 25 years. He contributes ₹12,00,000. With an average of 8.5% returns, his corpus reaches ₹44,00,000. He withdraws 60% (₹26,40,000) tax-free and invests 40% (₹17,60,000) into an annuity, receiving ₹8,000 per month pension.

NPS offers three main investment choices. Let’s compare them below.
 

This mix allows investors to balance risk and reward, depending on age and financial goals.

Eligibility Criteria for NPS

Any Indian citizen (resident or NRI) between 18 and 70 years can open an account. KYC compliance is mandatory.

For Example, Neha, a 32-year-old NRI, opens an NPS account through her Indian bank. She contributes ₹6,000 monthly while working abroad. Even though she is overseas, her investments grow in India and remain compliant with FEMA rules.

Here are the main eligibility rules for NPS investors:

• Must be 18–70 years old.
   
• Only one NPS account is allowed.
   
• NRIs eligible, but PIOs cannot apply.
   
• KYC compliance is mandatory.

The eligibility rules make NPS inclusive but also ensure proper regulatory compliance.

NPS for Self-Employed and Business Owners

The National Pension Scheme is not just for salaried employees, it is also a smart tax-saving option for self-employed professionals and business owners.

For Example, Mehul, a 40-year-old self-employed consultant, earns ₹10,00,000 annually. By contributing 20% of his gross income (₹2,00,000) into NPS, he claims the maximum deduction under Section 80C (₹1,50,000) and an additional ₹50,000 under Section 80CCD(1B). This reduces his taxable income to ₹8,00,000, saving him nearly ₹41,600 in taxes in a single year.

Here are the Key Points for Self-Employed Investors:

• Deduction up to 20% of gross income under Section 80CCD(1).
   
• Additional ₹50,000 deduction under Section 80CCD(1B).
   
• Full market-linked returns and retirement corpus benefits like salaried individuals.
   
• No employer contribution benefit, but greater flexibility in contributions.

For self-employed individuals, NPS doubles as a retirement safety net and a tax-saving tool, making it one of the most efficient investment choices.

NPS Tax Benefits Under Different Sections

NPS provides tax benefits under Sections 80C, 80CCD(1), 80CCD(1B), and 80CCD(2).

For Example, Amit, 30, earns a salary of ₹6,00,000 annually. He contributes ₹60,000 (10% of salary), gets ₹1,50,000 benefit under 80C. He adds ₹50,000 under 80CCD(1B). His employer adds ₹60,000 under 80CCD(2). He saves ₹2,60,000 in total deductions under the old tax regime.

Here’s a comparison of NPS benefits under old vs new tax regimes.
 

The old regime offers maximum tax savings, while the new regime is limited to employer contributions.

Taxation on NPS Withdrawals

Withdrawals under the National Pension Scheme (NPS) are partly exempt from tax and partly taxable.

For Example, Suresh, aged 58, has a retirement corpus of ₹40,00,000. On early exit, he withdraws 20% (₹8,00,000) tax-free. The remaining ₹32,00,000 is used to purchase an annuity. This provides him with a monthly pension of about ₹15,000, which is taxable as per his income slab.

Below is a quick view of how different withdrawals are taxed:
 

NPS provides a balance, allowing tax-free lump sums for immediate needs while ensuring a steady, taxable pension for long-term security.

Tips to Maximise Returns from NPS:

Maximise NPS returns by choosing the right asset mix and regularly reviewing your portfolio performance. Use active choice, adjust equity allocation, and monitor fund manager performance to optimise long-term gains.

Maximising returns from the National Pension System (NPS) requires a strategic and informed approach. The table below highlights key tips along with explanations to help you get the most out of your NPS investments:
 

By following these tips, you can make smarter decisions, enhance your returns, and build a stronger retirement corpus through NPS.

Conclusion

The National Pension Scheme is a reliable and tax-efficient way to build a retirement fund. With flexible investment options, up to ₹2,00,000 annual tax savings, and 60% tax-free withdrawals at retirement, it offers both security and growth. By starting early, individuals can use FinTech platforms for quick onboarding and maximise long-term benefits.

FAQ:

Q1. Can OCI cardholders open and contribute to an NPS account?
Yes, Overseas Citizens of India (OCI) can open and contribute to NPS accounts, provided they use an NRE or NRO bank account.

Q2. Do central government employees still have the option to switch to the Unified Pension Scheme (UPS)?
Yes, central government employees have until 30 September 2025 to decide whether to remain with NPS or move to UPS. The choice is one-time and final.

Q3. How do NPS and UPS compare in terms of pension payouts and lump sum benefits?
UPS offers a fixed monthly payout and a defined lump sum with Dearness Relief, while NPS provides potentially higher returns but with market-linked variation.

Q4. If a state government adopts the Old Pension Scheme (OPS), can NPS funds be transferred or refunded?
No, contributions made under NPS remain with PFRDA. There is no legal provision for a refund or transfer to the state-run OPS.

Q5. Is UPS treated the same as NPS in terms of tax benefits?
Yes, both NPS and UPS enjoy the same tax treatment on maturity corpus and pension, making the tax impact neutral between them.

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‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.