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Launched by the Government in 2004, and opened to the public in 2009, NPS, is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.

It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it. Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.

Let’s understand NPS in detail.

NPS offers investors two types of accounts to invest in Tier I and Tier II. Tier I is a mandatory account for all NPS investors while Tier II is voluntary. Tier I investments are eligible for NPS deductions or NPS tax saving benefits, under Section 80C and Section 80CCD(1B) of the Income Tax Act, 1961.

NPS tax benefits for annual contributions are as follows:

Two things to note here are:

Apart from the annual tax deductions that can be claimed under Section 80C and Section 80CCD (1B), investors can claim a few additional NPS deduction benefits in some cases. Here are the other NPS tax-saving benefits:

EEE or exempt-exempt-exempt is an attractive tax status for financial instruments in India. To qualify as an EEE, an investment must:

Prior to the 2019 Union Budget, NPS investments had an EET tax status. This meant that a part of the maturity amount, up to 20% of the corpus, was subject to taxation on lumpsum withdrawal. However, in the 2019 Union Budget, Finance Minister Nirmala Sitharaman made the entire 60% corpus withdrawal tax-free.

Since NPS tax exemptions now extend to the investment amount, growth of corpus as well as the maturity amount (to an extent), it enjoys the EEE (exempt-exempt-exempt) status in India. It is one among a select few financial products that enjoy this benefit.

For employees, i.e. salaried individuals, the NPS tax rebate can be substantial. This is especially true for individuals in the highest income tax bracket of 30%. The National Pension System tax benefit under Section 80 CCD(1B) alone can save ₹15,600 in taxes in a year.

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