National Pension System: Your Ultimate Tool for Tax-Efficient Retirement Security

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Financial planning is a crucial step in achieving one’s life goals. A robust financial plan can help manage income, expenses, and investments, enabling us to build the life we aspire to. It takes into account fluctuating expenses, unexpected exigencies, and economic downturns. One key aspect of financial planning is tax planning. By managing taxes effectively using available income tax deductions/exemptions, one can significantly reduce their total tax liability while adhering to their financial plan. One such tax-efficient investment option is the National Pension System (NPS).

What is the National Pension System (NPS)?

The National Pension System (NPS) is an investment cum pension plan launched by the Indian Government. It is open to any Indian citizen from the age group of 18 years to 70 years, as well as employees from the public, private, and the unorganised sectors, except those working in the Armed Forces.

NPS is primarily designed to provide retirement security through attractive investment options accessible during the working years and flexible pension drawing solutions available in the retirement years. However, it also serves as a great tool for tax exemption.

How to Invest in an NPS Account

NPS offers low-cost pension plans wherein an individual can invest in a mix of equity, government debt, alternate investment funds, and corporate debt. The allocation to Equity is capped at 75% till the age of 50, after which it reduces steadily while the % allocation to debt increases.

NPS comes with a lot of flexibility regarding deposits and withdrawals. You can opt for two kinds of account preferences: NPS Tier 1 and Tier 2. Both the NPS accounts come with inherent benefits, and taxpayers can select the one that is best suitable for them.

NPS Tier 1 Account

The NPS Tier 1 account is specifically designed for retirement security creation and is the one associated with tax sops. Investments in NPS Tier 1 account cannot be withdrawn till retirement or the age of 60, barring exceptional circumstances such as the death of the account holder or medical exigencies, etc.

Under this account, an individual has to make a minimum contribution of Rs. 1,000 while opening the account and can withdraw up to 60% of the total amount they have accumulated after their retirement in a tax-exempt manner. The balance 40% is used to buy annuities to secure a regular monthly income source in the form of a pension. During the contributing years, Rs 1,000 has to be deposited by the NPS subscriber in a year and Rs 500 at one time.

NPS Tier 2 Account

The NPS Tier 2 account, on the other hand, is a voluntary savings account having no lock-in period. It is akin to an open mutual fund, in terms of allowing easy liquidity with the withdrawal process generally taking up to three days. Individuals can either withdraw the entire corpus as a lump sum or go for multiple withdrawals without any limit.

There are no tax sops offered to investors in NPS Tier 2, except for subscribers who are government employees, for whom contributions to NPS Tier 2 are eligible for deductions under Sec 80 C. However, in availing this exclusive tax sop, the subscriber would have to bear a lock-in period of 3 years. There is no minimum balance or minimum contributions requirements in a year; however, the minimum contribution amount at any point in time is Rs 250.

Tax Benefits of NPS

If you have an NPS Tier 1 account, you will get to enjoy an Exempt-Exempt-Exempt (EEE) status where the First Exempt is with respect to contributions to it. Any individual who is a subscriber of NPS Tier 1 account can claim tax benefit under Sec 80 CCD(1) within the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Additionally, NPS Tier 1 account is eligible for an additional tax deduction of Rs 50,000 under IT Sec 80 CCD (1 B), which is over and above the Rs 1.5 Lac ceiling prescribed under Sec 80 CCE. And the tax sops do not stop here for NPS. For subscribers under the NPS Corporate Model, employer’s contribution upto 10% of the employee’s basic + DA salary p.a. is also Tax-deductible under IT Sec 80 CCD (2).

The second Exempt is applicable to the stage where the contributions are earning returns and accumulating without any tax deduction occurring. The third Exempt is applicable to the stage where the subscriber withdraws funds from NPS Tier 1 upon superannuation. 60% of the accumulated corpus can be withdrawn in a tax-free lump sum manner and the balance 40% is to be mandatorily annuitised.

Why Opt for NPS

Choosing to create an NPS account is one of the first steps that any person can take towards financial planning. In order to encourage people to opt for pension plans, it has also lowered the age barrier. Currently, anyone who is 18+ years can open an NPS account through which they will get a Permanent Retirement Account Number (PRAN) that allows easy portability in case the need arises, including a change in location or job.

The minimum contribution is as low as Rs. 500 (one time) and Rs. 1,000 (yearly) for Tier I accounts and Rs. 250 (annually) for Tier II accounts. Contributions to NPS accounts can be made up to 70 years of age. A portion of the NPS also goes to equities which may not offer guaranteed returns. However, the returns offered are much higher than traditional tax-saving investments like the PPF. Further, an NPS account can be opened hassle-free both online as well as offline.


Investing in the National Pension System (NPS) can be a smart move for anyone looking to secure their retirement while also enjoying significant tax benefits. With its flexible investment options, tax advantages, and the potential for high returns, NPS can be an integral part of your financial planning journey.

Remember, the key to successful financial planning is to start early, invest wisely, and stay committed to your financial goals. With the right planning and disciplined investing, you can ensure a comfortable and secure retirement.

Disclaimer: This article is for informational purposes only and is not intended to be a substitute for professional financial advice. Always seek the advice of a qualified financial advisor or other qualified professional with any questions you may have regarding your financial planning.

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