How To Save Tax with NPS?


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Are you thinking about a worry-free retirement? The National Pension System (NPS) in India is a smart choice, not just for building a retirement fund but also for its income tax perks. Let's break down the tax benefits of NPS in an easy-to-understand way.

NPS Breakdown: Saving for Retirement Made Easy

NPS lets you save for your golden years with the bonus of potential market-linked returns. The best part is tax savings. Let's see how!

Easy Tax Wins with NPS​

NPS has two accounts: Tier I (you must have this) and Tier II (optional but cool). Here's the tax lowdown:

For Your Must-Have Tier I Account

  • 1. Put in Your Money, Get Tax Perks (80CCD (1)):
    • Save up to Rs. 1.5 lakh from your taxes—just by putting money in your NPS.
  • 2. Let Your Boss Help You (80CCD (2)):
    • If you're a salaried hero, get up to 14% of your salary (10% for private employees) as a tax perk.
  • 3. Extra Goodies for You (80CCD (1B)):
    • Extra Rs. 50,000 deduction for your self-contributions.
  • 4. More Cool Tax Stuff:
    • Section 80C: Stick your money in NPS and save up to Rs. 1.5 lakh.
    • Section 80CCD (1B): Grab an extra Rs. 50,000 deduction.
By playing the NPS game, you might save Rs. 62,400 in taxes if you're in the 30% tax squad.

For the Optional Tier II Account

No tax benefits here, but it's a handy place for extra savings and withdrawals.

Extra Tax Goodies with NPS

  • Get Cash When You Need It (Tax-Free!):
    • After 3 years, pull out 25% for important stuff like medical bills—tax-free!
  • Watch Your Money Grow (Tax-Free!):
    • The returns you earn from NPS? They're tax-free till you cash out.
  • Big Payouts at the End (Mostly Tax-Free!):
    • At 60, take 60% as a tax-free lump sum. The rest goes into annuities (a fancy word for retirement pension).
  • Grab Even More (Tax-Free!):
    • Lump Sum withdrawal after 60? Totally tax-free under Section 10(12A).
  • Secure Your Future with Annuities (Tax-Free!):
    • Annuities are tax-exempt too under Section 80CCD(5).

Why is NPS so Tax Efficient?​

NPS falls under Exempt-Exempt-Exempt (EEE) category:

  • Tax deduction from your salary.
  • Tax-free growth.
  • Tax exemption when you finally use it.
Tax Wins for Salaried Employees

If you're a salaried employee, NPS brings you some serious tax perks:

  • Deductions for what you put in (80CCD (1)).
  • More deductions for your boss's contributions (80CCD (2)).
  • Bonus deductions for what you add (80CCD (1B)).
Tax Benefits for Self-Employed

Even if you're your own boss, NPS has your back:

  • Deduct up to 20% of your income (80CCD (1)).
  • Grab an extra Rs. 50,000 deduction (80CCD (1B)).


The National Pension System (NPS) is a tax-saving retirement plan with two accounts: Tier I and Tier II. Tier I offers substantial tax benefits including self-contribution, employer's contribution, extra deductions, and double and triple deductions under different sections. Tier II is great for additional savings but doesn't provide tax benefits. NPS also provides tax perks such as tax-free withdrawals after three years, tax-free returns, and tax benefits on annuity purchases. NPS has EEE status, making it a coveted investment.