NPS Tax Benefits Under 80CCD: How to Maximise Your Savings in 2025?
As tax-saving season rolls around, you must be looking for reliable ways to lower your taxable income while staying on track with long-term financial goals. The National Pension System (NPS) does both; it helps you plan for retirement and save on taxes under Section 80CCD.
This article covers how you can avail of the significant tax benefits with NPS section 80CCD deductions to maximise your savings in 2025. Keep reading to learn more.
What is NPS?
The National Pension System (NPS) is a retirement savings scheme that aims to offer financial safety to individuals after their retirement. It enables subscribers to contribute regularly towards their pension corpus, which is then invested in market-linked instruments.
Eligibility
- Indian citizens between 18-65 years of age
- Both residents and non-residents can open an NPS account
- Requires KYC compliance and a Permanent Retirement Account Number (PRAN)
Returns
- Market-linked returns that typically range between 8-12% annually
- Historical data shows NPS has delivered competitive returns compared to traditional options like PPF
- Returns vary based on chosen asset allocation and market performance
Asset Allocation
- Equity (E): Invests in stocks with a cap of up to 75%
- Corporate Bonds (C): Invests in corporate debt securities
- Government Securities (G): Invests in securities and bonds issued by the government
- Alternative Investment Funds (A): Invests in alternative asset classes
Subscribers can choose their asset allocation or opt for auto choice based on age.
Tier Structure
The National Pension System (NPS) offers two distinct account types, i.e., Tier I and Tier II. Each tier is designed to serve different financial objectives while providing retirement security.
| Feature | Tier I | Tier II |
|---|---|---|
| Account Type | Primary retirement account | Voluntary savings account |
| Initial Minimum Contribution | ₹500 | ₹1,000 |
| Ongoing Minimum Contribution | ₹500 monthly/₹1,000 annually | ₹250 per month |
| Account Requirement | Mandatory first account | Requires an active Tier I account |
| Primary Purpose | Long-term retirement planning | Flexible investment option |
After analysing the fundamental differences between the two account tiers, it is time to explore the NPS Tier 2 account further to understand its flexible features and tax benefits.
NPS Tier 2 Account
While NPS Tier 1 is the primary retirement account with restrictions on withdrawals, NPS also offers a Tier 2 account, which functions as a voluntary savings facility with greater liquidity.
- Higher Liquidity: No withdrawal restrictions, allowing you to access funds as needed
- Lower Expense Ratio: Management fees for NPS funds are much lower compared to mutual funds
- Tax Benefits: For central government employees, contributions to NPS Tier 2 are eligible for tax deduction under Section 80C, provided the amount is locked in for three years
- Flexibility: Similar investment options as Tier 1, allowing you to choose your asset allocation according to your risk profile
- No Mandatory Annuity: Unlike Tier 1, Tier 2 withdrawals don't require annuity purchases
NPS Tax Benefits
The substantial tax benefits under section 80CCD of the Income Tax Act make NPS particularly attractive. This section is divided into three sub-sections, each offering distinct tax advantages:
Self-Contribution Tax Benefits (Section 80CCD(1))
Under Section 80CCD(1), your personal contributions to NPS qualify for tax deductions as follows:
- Up to a maximum of 10% of your salary (Dearness Allowance + Basic Salary) for salaried individuals
- Up to 20% of gross income for self-employed professionals
- These deductions fall within the overall limit of ₹1.5 lakh under Section 80C
Additional Tax Benefits (Section 80CCD(1B))
Section 80CCD(1B) offers an exclusive additional NPS Tier 2 tax benefit on qualifying investments:
- Permits a further deduction of up to ₹50,000 exclusively for NPS contributions
- This benefit is over and above the ₹1.5 lakh limit available under Section 80C
- For FY 2024-25, even if you have exhausted your Section 80C limit through other investments, you can still get this additional deduction
Employer Contribution Tax Benefits (Section 80CCD(2))
Here are important details on the NPS tax benefit for salaried employees whose employers contribute to their NPS account:
- Up to a maximum of 10% of your salary (Dearness Allowance + Basic Salary) for salaried individuals
- There is no upper monetary limit to this deduction
- This is separate from your Section 80C and Section 80CCD(1B) limits
Corporate NPS Tax Benefits
When companies offer NPS as part of their employee benefits package:
- For employers: Contributions to employees' NPS accounts are considered business expenses and reduce the company's taxable income
- For employees: Employer contributions are tax-deductible under Section 80CCD(2) with no upper limit
- This creates a win-win situation that makes corporate NPS a valuable component of employee compensation packages
NPS Scheme Tax Benefits at Withdrawal
The tax advantages of NPS extend to the withdrawal phase as well:
At Retirement (Age 60 or Above)
- You can withdraw up to 60% of the total corpus as tax-free
- The remaining 40% of the corpus should be used to invest in an annuity that provides a regular pension
- This annuity income is taxable as per your income tax slab
For Premature Withdrawals (Before Age 60)
- You are eligible to withdraw up to a maximum of 20% of the corpus as tax-free
- 80% must be used to purchase an annuity
- Part withdrawals (up to a maximum of 25% of total contributions made by you) are allowed after three years of joining NPS for particular requirements like higher education, marriage, home purchase, or medical treatment
Conclusion
The NPS scheme tax benefits under section 80CCD provide a powerful opportunity to reduce your tax liability while significantly securing your retirement. By strategically utilising all three subsections (80CCD(1), 80CCD(1B), and 80CCD(2)), you can save a substantial tax amount in 2025.
While you build your long-term financial security through NPS, remember that Hero FinCorp's instant personal loans are available to support your immediate financial needs, fostering a balanced approach to your financial health.
Frequently Asked Questions
1. What is the maximum tax benefit I can get from NPS in 2025?
Under Section 80CCD(1), you can claim deductions up to 10% of your salary (for salaried) or 20% of gross income (for self-employed) within the overall Section 80C limit of ₹1.5 lakh. Additionally, you can claim up to ₹50,000 under Section 80CCD(1B), and if your employer contributes to your NPS, that amount is deductible under Section 80CCD(2) with no upper limit.
2. Is NPS better than PPF for tax saving?
Both NPS and PPF offer tax benefits, but NPS potentially offers higher returns due to its equity component and higher tax benefits through Section 80CCD(1B) and Section 80CCD(2). However, PPF offers guaranteed returns and is completely tax-free at maturity.
3. Can I withdraw from my NPS account before retirement?
Yes, partial withdrawals (up to 25% of your contributions) are allowed after 3 years of joining NPS for specific purposes like higher education, marriage, home purchase, or medical treatment. However, premature withdrawal of the entire corpus (before age 60) requires 80% to be used for annuity purchase.
4. How is corporate NPS different from individual NPS?
The corporate NPS program is provided by employers under their employee benefits program. The key difference is that corporate NPS allows for employer contributions, which are tax-deductible under Section 80CCD(2), providing additional tax benefits beyond what's available in individual NPS.
Disclaimer
The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.
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