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NPS (National Pension Scheme): Income Tax Benefits Explained In 10 Points

The salaried as well as the self-employed can claim NPS tax benefit.

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NPS (National Pension Scheme): Income Tax Benefits Explained In 10 Points

There are additional income tax benefits on National Pension Scheme contribution routed through employers


In Budget 2017, the government announced more income tax incentives for investing in NPS or National Pension Scheme. Both the salaried as well as self-employed get income tax benefits on investing in NPS. On maturity, NPS is also partially tax exempt. NPS, which is a voluntary, defined contribution retirement savings scheme, enables the subscriber to accumulate savings during his or her working life. National Pension Scheme (NPS) offers two types of accounts - Tier I and Tier II. The Tier 1 account is non-withdrawable till the person reaches the age of 60. Partial withdrawal before that is allowed in specific cases. On the other hand, the Tier II National Pension Scheme account is just like a savings account and subscribers are free to withdraw the money as and whenever they require.

National Pension Scheme (NPS) Income Tax Benefits You Need To Know On Tier 1 Accounts


1) Income Tax Benefits For Salaried Individuals

An investment up to 10 per cent of salary (basic + dearness allowance) is deductible from taxable income under Section 80CCD

(1) of the Income Tax Act in a financial year, subject to a limit of Rs 1.5 lakh under Section 80C.

2) Additional NPS Income Tax Benefits For Salaried Individuals

An additional investment up to Rs.50,000 is also deductible from taxable income under Section 80CCD (1B).

3) Contribution routed through employer

Under the NPS corporate model, an employee can deposit the contribution directly or route the contribution through the employer he or she is working with. For investment routed through employer, the employer's contribution to NPS up to 10 per cent of basic salary (plus DA) is allowed deduction under Section 80CCD (2). There is no cap for this deduction but the total deduction claimed for contribution by the employer should not exceed 10 per cent of the salary.

4) Self-employed professionals

For self-employed professionals, investment up to 20 per cent of gross annual income is deductible from taxable income, subject to a limit of Rs 1.5 lakh. In Budget 2017, with an aim to bring parity in tax benefits, this limit for self-employed professionals was increased to 20 per cent of gross income, from 10 per cent earlier. This amendment will take effect from April 1, 2018 and will accordingly apply in relation to the assessment year 2018-2019 and subsequent years.

5) Additional income tax benefits for self-employed

Additionally, an investment up to Rs.50,000 is deductible from taxable income under Section 80CCD (1B) of the Income Tax Act, 1961.

6) Income tax on partial NPS withdrawal

NPS allows partial withdrawals for specific purposes before the subscriber reaches the age of 60. 25 per cent of the contribution made by a subscriber has been exempted from income tax, according to Budget 2017. This change will also take effect from April 1, 2018 and will accordingly apply in relation to the assessment year 2018-2019 and subsequent years.

7) When subscriber turns 60

According to the current tax laws, up to 40 per cent of the corpus withdrawn in lump sum is exempt from tax when the subscriber attains the age of 60.

8) Overall, an NPS subscriber can withdraw up to 60 per cent of the maturity corpus at the age of 60 and the remaining amount has to be converted into annuity. An annuity is a financial product that gives you periodic income or pension.

9) The balance amount invested in annuity is also fully exempt from tax.

10) However, income received in the form of annuity is taxable.


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