How to Save Tax through NPS Investments

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How to Save Tax through NPS Investments

The National Pension Scheme (NPS) offers an excellent way for Indian citizens to save for retirement. And also enjoying valuable tax benefits. With the average lifespan increasing and healthcare costs rising, all retirees must have a secure retirement fund available, which has become increasingly important. The NPS aims to provide exactly that: a way to build a retirement nest egg in a disciplined manner. 

What is NPS

What does NPS stand for? NPS is the National Pension Scheme, which was introduced in 2004. The NPS is a government-sponsored pension system in India. It aims to provide old-age financial security. Whether you are employed in the private, public, or unorganised sectors, the NPS works on a contributional model that is predefined, allowing investors to choose their preferred investment strategy and pension fund manager. 

Some key features of the NPS

  • Available to Indian citizens between 18-70 years of age.
  • Portable across jobs and geographies.
  • Choice of multiple pension fund managers and asset classes.
  • Built-in options to systematically withdraw corpus after retirement.
  • Offers tax benefits up to Rs. 2 lakhs annually.

Growing a substantial retirement corpus throughout one's working years is possible with consistent NPS investments. Upon retirement, up to 60% of this corpus may be taken out as a tax-free lump amount under the current NPS standards. The remainder has to go towards funding a monthly pension plan.

How to Save Tax by Investing in NPS

The NPS's main attraction is its superior tax advantages. Several parts of the Income Tax Act provide NPS payment deductions for self-employed people and employees.

For Salaried Employees

  • Up to 10% of the basic salary can be invested in NPS under Sec 80CCD(1) within the overall Rs. 1.5 lakh limit of Sec 80C. 
  • Under Section 80CCD(1B), an additional Rs. 50,000 may be invested over and above the Sec 80C limit.
  • Under Section 80CCD(2), employers are eligible for tax advantages on contributions up to 10% of base pay.

For Self-Employed persons

  • Under Section 80CCD(1), investments of gross income are permitted within the total Rs. 1.5 lakh Sec 80C limit.
  • A tax advantage of an extra Rs. 50,000 on donations made under Sec. 80CCD (1B). 

On Maturity

  • Up to 60% of the accumulated NPS corpus can be withdrawn tax-free on retirement/maturity under Sec 10(12A). 
  • The amount used to purchase an annuity is eligible for deduction under Sec 80CCD(5).

Partial Withdrawals 

  • Following Section 10(12A), up to 60% of the total NPS corpus may be taken out tax-free at retirement or maturity. 
  • Under Section 80CCD, the amount utilised to buy an annuity is deductible (5).

How To Open an NPS Account

Opening an NPS account is quick and straightforward in the following steps:

  • Choose a POP (Point of Presence) bank, broker, or other intermediary registered with the PFRDA.
  • Fill out a subscriber registration form and provide KYC documents.
  • An NPS account comprising Tier I and II will be opened. The PRAN card, login ID, and other details will be provided. 
  • Select your preferred investment strategy, Active or Auto Choice. Under Auto, funds get invested in a pre-determined ratio.
  • Spread out your investments throughout a variety of asset classes.
  • Select the NPS fund managers for each asset type.

And that's it! You may immediately begin contributing to your NPS account and get yearly tax advantages of up to Rs. 2 lakh.

Types of NPS Accounts

There are two types of NPS accounts:

  • Tier I Account: The main retirement account offering tax benefits. The minimum annual contribution is Rs. 1,000 for the salaried class and Rs. 500 for the self-employed. Premature closure and withdrawals are restricted.
  • Tier II Account: A voluntary savings account. There are no minimum contributions or restrictions on withdrawals. No tax benefits on investments.

NPS Returns

Here are the latest NPS returns across various asset classes:

NPS Tier I Returns

Asset Class1 Year5 Years10 Years
Corporate Bonds12-14%9-10%10-11%
Govt. Securities13-14%10-11%9-10%
Alternate Assets4-17%NANA

NPS Tier II Returns

Asset Class1 Year5 Years10 Years
Corporate Bonds13-16%9-10%10-11%
Govt. Securities13-14%10-12%10-11%


The NPS offers an efficient way to build a retirement corpus while enjoying substantial tax savings. By investing early and regularly, the power of compounding can help accumulate a sizable nest egg. The excellent tax benefits, portfolio choice, and liquidity options make the NPS a compelling retirement planning avenue for all Indian citizens. So start investing for your golden years and save tax simultaneously with the National Pension Scheme.