Government-backed National Pension Scheme is one of the best investment options to build a retirement corpus. Administered by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers tax-saving benefits to subscribers. Compared to other assets in the category, NPS stands out with a couple of lucrative features.

Under NPS, individual savings are pooled into a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines into the diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

​At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empaneled Life Insurance Company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.

NPS eligibility:

A citizen of India, whether resident or non-resident, between 18 – 70 years of age as on the date of submission of the application to the POP/ POP-SP is eligible to open an NPS account. Applicant should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. All the documents required for KYC compliance need to be mandatorily submitted for the NPS account to be opened.

NPS has two accounts - Tier I and Tier II. While Tier I is the default account for tax benefit purposes, Tier II account is optional. When you open an NPS account, Tier I account is opened as default and one can avail tax benefit on Tier I investment.

Triple income tax benefits of NPS:

• Section 80CCD (1): Tax-benefit under section 80CCD (1) is available on an individual's self-contributions to the NPS  Tier-I account. In the existing regime, an individual can claim tax benefit on a maximum self contribution of Rs 1.5 lakh in a financial year to the Tier-I NPS account. The amount deposited up to Rs 1.5 lakh can be claimed as deduction from gross total income. Note that this deduction comes under the overall limit of section 80C of the Income Tax Act. Current income tax laws allow maximum deduction of Rs 1.5 lakh under sections 80C, 80CCC and 80CCD (1).
• Section 80CCD (2): Tax benefit under 80CCD (2) can be claimed by the individual when the employer deposits the money on behalf of the individual in the NPS Tier-I account. According to the existing tax laws, the employer can deposit a maximum of 10 per cent of the individual's salary in NPS Tier-I account. Salary here meaning basic salary plus dearness allowance (DA). There is no maximum restriction on how much can be deposited as long as it does not exceed the 10 per cent limit. The amount deposited by the employer can be claimed as deduction from gross total income before tax. The tax benefit under this section is over and above Section 80CCD (1).
• Section 80CCD (1b): An individual can claim tax deduction under 80CCD (1b) for a maximum of Rs 50,000 in a financial year. This additional deduction was introduced in the financial year 2015-16. The additional tax benefit of Rs 50,000 is over and above tax-break under section 80CCD (1) and 80CCD (2).

What this means for investors:

NPS is not fully tax-exempt presently. However, one can claim deduction for contribution made towards NPS account, under Section 80CCD (1) and 80CCD (1B). The income accrued during continuance of the account is also tax free. The annuity received is fully taxable in the year of receipt. 

The employer’s contribution to your NPS account is tax free up to 10% of your salary subject to an annual overall ceiling of Rs 7.50 lakhs for NPS, provident Fund and Superannuation contribution made by the employer taken together. Even though your employer does not have an NPS, you can still open an NPS account and claim deduction for contribution made to your NPS account up to Rs 1.50 lakhs under Section 80CCD(1) along with other eligible items of Section 80 C of the Income Tax Act. 

Moreover, you can claim an exclusive deduction of Rs 50,000 under Section 80 CCD(1B) over and above Rs 1.50 lakhs for contribution made towards your NPS account.