The National Pension System (NPS) is a government-backed pension scheme for Indian citizens aged 18-70. The scheme matures at retirement or upon reaching 60. However, it allows partial withdrawals and premature exits during a financial emergency, subject to certain conditions. NPS was initially available only for government employees, but the Pension Fund Regulatory Development Authority (PFRDA) later made it open to all Indian citizens who can apply voluntarily.

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The NPS scheme holds immense value for retirement planning, especially for workers from the organised sector. Upon retirement, the subscriber can withdraw up to 60 per cent of the accumulated corpus in a lump sum or via a systematic withdrawal plan. The rest of the corpus fund must be invested in annuities for monthly pensions. Section 80C of the Income-tax Act of 1961 grants tax benefits for contributions to the NPS scheme to encourage people to save.

NPS Tax Benefits For Subscribers

NPS subscribers can avail of tax benefits up to Rs 1.50 lakh in a financial year for their contributions to the scheme under section 80 CCD (1) of the Income Tax Act. An additional deduction of up to Rs 50,000 is also allowed under section 80 CCD (1B).

Employers can deduct up to 10 per cent of the employee’s basic salary plus dearness allowance towards the fund. They can also claim a tax deduction for contributions to the employees’ NPS accounts, limited to 10 per cent of the salary (Basic + DA) under the “Business Expense” category in the profit and loss account under Section 36(1) (iv) (a).

Tax Benefits For Self-Employed

Self-employed individuals can also contribute to the NPS fund to avail of pensions and tax benefits up to 20 per cent of their gross annual income, but within the Rs 1.50 lakh ceiling under Section 80 CCE and an extra Rs 50,000 under Sec 80 CCD (1B), taking the total to Rs 2 lakh.

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Taxation On NPS Maturity Amount

NPS subscribers can withdraw 60 per cent of the accumulated retirement corpus tax-free, either in a lump sum or through a systematic withdrawal plan. The remaining 40 per cent used for buying annuities is also tax-free under section 10 (12A). However, the interest income from the annuities is taxed under section 80CCD (3).