NPS is a tax-saving and long-term investment tool, managed by the Pension Fund Regulatory and Development Authority (PFRDA). The advantage of retirement planning through NPS is the fact that in addition to saving for your retirement years, you can also save big on tax.
In this article, we’ll explore NPS tax benefits that can be availed through Tier I and Tier II accounts.
Understanding NPS Tier 1 vs Tier 2 accounts
| Feature | NPS Tier 1 Account | NPS Tier 2 Account |
| Account Opening | Tier 1 account opening is a prerequisite for opening a Tier 2 account | Can be opened only if Tier 1 account is active |
| Who Is Eligible? | All Indian citizens between the ages of 18 and 70 | Any Indian citizen with an active Tier I account |
| Mandatory Account | Mandatory for all NPS subscribers | Voluntary add-on account |
| Taxes on Withdrawals | 60% of the corpus, which is what can be withdrawn at maturity, is exempt from taxes. | The withdrawn amounts are added to the account holder’s income, which is taxed as per the current income tax slab rates. |
| Are Contributions Exempt From Tax? | Contributions up to INR 1,50,000 per year qualify for deductions under section 80 C of the Income Tax Act.
Further deductions of INR 50,000 can be availed under Section 80 CCD(1B). |
No, contributions made to Tier II accounts are not exempt from tax |
| Minimum Contribution Required to Open Account | INR 500 | INR 1,000 |
While NPS Tier I is suited for retirement planning, Tier II NPS accounts serve as voluntary savings accounts. Tier I NPS investment is a lifetime investment that cannot be withdrawn until retirement. This is not the case for Tier II NPS accounts.
We have seen the difference between Tier I and Tier II NPS accounts. Now, let’s explore the different tax benefits that come with Tier 1 and Tier II accounts.
Tax benefits under NPS
- Self-Contribution tax benefits to employees
Employees contributing to NPS receive the following tax benefits on their own contribution:
Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD (1) up to Rs. 1.50 lakhs under Sec 80 CCE.
Additional Tax deduction up to 50,000 under section 80 CCD (1B) above and beyond the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- Employer contribution – tax benefits to employees.
Eligible for tax deduction up to 14% of salary (Basic + DA) paid by employer under Section 80 CCD (2) over Rs. 1.50 lakh as per section 80 CCE.
- Self-employed get tax benefits
Self-employed contributors to NPS receive the following tax benefits on their own contribution.
Tax deduction up to 20% of gross income under section 80 CCD (1) up to an aggregate ceiling of Rs. 1.50 lakhs under Sec 80 CCE.
Additional Tax deduction up to 50,000 under section 80 CCD (1B) above and beyond the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- Tax benefit on Annuity purchase
Tax exemption on purchase of annuity upon reaching age 60 or superannuation under section 80CCD (5). However, any later income from the annuity is taxed under section 80CCD (3).
- Lump sum withdrawal tax benefit
Tax exemption on lumpsum withdrawal of 60% of accumulated pension wealth upon reaching age 60 or superannuation under section 10 (12A) (1).
- Tax Benefits to Corporates / Employers
Eligible for tax deduction on the amount contributed as employer’ s contribution towards the NPS account of employees, up to 14% of the salary (Basic DA) of employer’s contribution as ‘Business Expense’ from the Profit and Loss Account under section 36(1)(iv)(a).
Read more about the NPS Scheme benefits here.
To open your NPS Account, click here.
