More Clarity On NPS And Tax Deductions. Excellent Option For Both Salaried And Self-Employed Individuals, Can Save Big Under Both Tax Regimes

If you’re looking to maximize your tax savings while securing your retirement, it’s time to take a hard look at the National Pension System (NPS). Despite being around for over a decade, many salaried and self-employed individuals are still missing out on the substantial tax benefits it offers. Whether you’re under the old or new income tax regime, NPS could be the key to trimming your tax bill significantly.

How Much Tax Can You Save With NPS?

For salaried individuals, the tax-free annual income threshold can go up to ₹13.7 lakh—compared to ₹12 lakh for others—when factoring in the ₹75,000 standard deduction and NPS investments. Under Section 80CCD(2), up to 14% of an employee’s basic salary (for government employees) and 10% (for private sector employees) contributed to NPS is tax deductible.

If your basic salary is ₹6.85 lakh (assuming 50% of a ₹13.7 lakh package), your employer’s NPS contribution at 14% would be ₹95,900. Add in the ₹75,000 standard deduction, and suddenly your entire ₹13.7 lakh income is tax-free—a potential tax saving of about ₹96,000.

The catch? Your employer must offer NPS as part of your salary structure. You can’t opt for it independently unless you’re self-employed, in which case, different rules apply.

Tax Benefits Under Various Sections

NPS contributions qualify for deductions under three sections of the Income-tax Act, 1961:

1. Section 80CCD (1)

—Salaried employees can claim a deduction of up to 10% of salary (Basic + DA)

—Self-employed individuals can claim up to 20% of gross total income

—The deduction limit is ₹1.5 lakh per financial year

—This falls under the overall ₹1.5 lakh limit of Section 80C

2. Section 80CCD (1B)

—Additional deduction of ₹50,000 over and above the ₹1.5 lakh limit

—Available to both salaried and self-employed individuals

3. Section 80CCD (2)

—Employer’s contribution to NPS qualifies for deduction

—Limit: 14% of basic salary (for central govt. employees) or 10% for others

—Max employer’s contribution deduction: ₹7.5 lakh (includes EPF and superannuation fund)

—Only available to salaried employees (not self-employed)

NPS Under Old vs. New Tax Regime

If you’re under the old tax regime, you can claim deductions under all three sections—80CCD (1), 80CCD (1B), and 80CCD (2)—making NPS a highly effective tax-saving tool.

Under the new tax regime, most deductions are removed, but Section 80CCD (2) still applies, meaning you can still save tax through your employer’s NPS contribution.

How Much Return Can You Expect from NPS?

NPS offers four asset classes—Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds—giving investors flexibility in choosing their asset allocation. Returns vary based on fund performance, but historically, NPS equity funds have given returns of around 13-15% annually, while corporate bond and government securities funds have yielded 7.5-8%.

The Unpopular Yet Highly Effective Tax-Saving Tool

Despite its clear advantages, NPS remains underutilized, with only 2.2 million people enrolled so far. The main deterrents? A long lock-in period and restrictions on withdrawals. You can’t withdraw your money before retirement except in extraordinary situations, and even at maturity, only 60% of the corpus is available for withdrawal, while 40% must be invested in an annuity for a lifetime pension.

While this lack of liquidity may seem like a drawback, financial experts argue that it actually works in favor of investors by ensuring disciplined retirement savings.

So, Should You Invest in NPS?

Let’s be honest—NPS isn’t for those looking for quick gains. It’s a retirement-focused investment, and the mandatory annuity may not appeal to everyone. Unlike EPF and PPF, where the maturity amount is fully tax-free, NPS taxes annuity withdrawals, making it slightly less flexible.

However, for those earning ₹15 lakh or more, NPS makes perfect financial sense. Why? Because in a high-growth economy like India, investing in equities has the potential to generate 13% annual returns, which, when compounded over decades, can build significant wealth.

Plus, if you’re already paying high taxes, taking full advantage of NPS deductions can put more money back in your pocket today, while setting you up for a comfortable retirement.

The Last Bit

If your employer offers NPS, it’s a no-brainer to opt in. If you’re self-employed, it still makes sense for long-term wealth building and tax savings. The key is understanding its restrictions and ensuring it aligns with your overall financial goals.

So, if you’ve been ignoring NPS because it sounds complicated—think again. Your future self might just thank you for making the smart move today!