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Everything About NPS Tax Deduction

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The National Pension System (NPS) plays an integral role for investors as it equips them with financial security during their retirement years. This government-owned investment option has grown in popularity since its inception for various reasons. For instance, it works as a systematic savings plan that prevails as a source of income after 60 years of age and is relatively low risk compared to many other investment options.

However, one of the biggest USPs of NPS is its tax benefit under Section 80CCD (1), wherein the contribution you make is eligible for deductions up to Rs 50,000. This comes in supplementation with the Rs 1.5 lakh exemption under Section 80C.

The current tax deduction announced and why
The Indian government recently announced a hike in the tax deduction limit from 10% to 14% for state government employees to make the scheme more attractive and viable for different investors. This means investors will be able to claim a tax benefit of 14% on the NPS contribution their employers make from 2022-23 onwards.

Presently, only central government employees enjoy the 14% tax deduction limit, while those in the private sector can claim a 10% benefit. The rationale behind increasing the limit for state government employees is to bring them financially on par with central government employees and provide meaningful social security benefits for their future.

This announcement is intended to drive more and more government employees to invest in the scheme and have a plan in place for retirement. The change will be in effect retroactively from 1 April 2020 and apply to every subsequent financial year to ensure no additional tax liability on any contribution above 10%.

What are the tax deductions under NPS?
Investing in NPS allows investors to reap tax benefits under three sections of the Income Tax Act of 1961.

  • If you invest up to Rs 1.5 lakh in any financial year, you are eligible for deductions under Section 80 CCD (1). This exemption falls under the overarching limit of Rs. 1.5 lakh prescribed by Section 80C.
  • There’s an additional deduction of up to Rs. 50,000 you can claim under Section 80CCD(1B) by investing in Tier 1 NPS accounts. Therefore, your total tax benefit amounts to Rs 2 lakh in a financial year, which is a significant sum to save, especially compared to other investment options.
  • Contributions from employers are also eligible for tax deductions under Section 80CCD (2), becoming taxable only if the contribution to NPS, EPF, and superannuation surpasses Rs 7.5 lakh in a given financial year.


Why is NPS a good instrument for long-term investment?

The National Pension System is specifically designed to help you save for retirement. As a long-term investment avenue, it might not suit every type of investor. Here are the key benefits of investing in the NPS:

  • Provides a consistent income source after you have retired, thus serving you in times of need. 
  • There is little risk in the investment since it’s government-owned and has an equity cap of 50% to 75%. This way, you can enjoy the rewards of the stock market without bearing any of the risks alone.
  • You can choose to allocate funds and design your portfolio as per your risk appetite, so you have enough flexibility to alter your strategy according to your fund’s performance.
  • The overall returns on investing in NPS are guaranteed, not to mention relatively higher than PPF or FDs.
  • Three different sections offer tax benefits for NPS investors, making it an attractive option for those who wish to save on taxes.


NPS has always been a smart and convenient investment option for Indian investors as it simplifies a significant problem: catering to your and your family’s financial needs post-retirement. Not only does it allow you to save lump-sum amounts for your golden years, but it also helps you save on taxes and create more wealth for your future.

Read more about the Union Budget 2022 Income tax changes here.


* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
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