Curious about securing your retirement finances? Discover NPS and its tax benefits

Secure retirement with NPS: Curious about securing your retirement finances? The National Pension System (NPS) offers a structured solution. With its two-tiered framework, NPS provides flexibility and tax benefits to suit various saver needs, say experts.

What is NPS?

The National Pension Scheme (NPS) is a government-backed initiative aimed at providing social security to employees across various sectors, except for the armed forces. It encourages regular investments during employment, allowing subscribers to withdraw a portion of their corpus upon retirement and receive the rest as a monthly pension. Originally limited to Central Government employees, the scheme is now open to all Indian citizens on a voluntary basis, offering portability, tax benefits, and the potential for higher returns through diversified investment options.

Tier I is obligatory for all subscribers and focusses on accumulating retirement savings. Withdrawals from this tier are restricted to specific circumstances such as retirement, critical illness, or certain expenses like education or home purchase. This ensures that subscribers build a substantial corpus for retirement. On the other hand, Tier II is optional and offers greater flexibility regarding withdrawals, albeit without the tax benefits of Tier I.

Subscribers have the freedom to choose their contribution amounts and frequencies based on their financial goals and capacity. NPS provides various investment options, including equity, corporate bonds, and government securities, allowing subscribers to tailor their investment strategy according to their risk appetite and investment objectives. These funds are managed by professional fund managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring optimal management and diversification of investments.

NPS tax breaks

The National Pension Scheme (NPS) offers significant tax benefits to both employees and self-employed individuals who contribute to the scheme. For employees, contributions to NPS qualify for tax deductions under Section 80CCD(1) of the Income Tax Act. They can claim deductions of up to 10 per cent of their pay (Basic + DA) within the overall limit of Rs. 1.5 lakh under Section 80CCE. 

Additionally, an extra deduction of up to Rs. 50,000 is available under Section 80CCD(1B). Employers' contributions to their employees' NPS accounts are also tax-deductible, up to 10 per cent of the employee's salary (Basic + DA) under Section 80CCD(2), or up to 14 per cent if made by the Central Government. Self-employed individuals can claim tax deductions of up to 20 per cent of their gross income under Section 80CCD(1), subject to the overall limit of Rs. 1.5 lakh under Section 80CCE, along with the additional Rs. 50,000 deduction under Section 80CCD(1B). Partial withdrawals from NPS accounts and annuity purchases enjoy tax exemptions under certain conditions. 

Lump sum withdrawals and corporate/employer contributions also receive tax benefits. Upon retirement at 60 years, individuals can withdraw up to 60 per cent of their total corpus tax-free, with the remaining amount directed towards an annuity plan, subject to specific guidelines and taxation rules.

Regulated retirement flexibility

NPS accounts offer portability across employers and locations, providing subscribers with flexibility and convenience in managing their retirement savings. Regulated by PFRDA, NPS ensures transparency, accountability, and security of investments for subscribers, making it an option for retirement planning in India.