Individual taxpayers, whether they are salaried or self-employed, have limited avenues of saving income tax. The National Pension System (NPS) is one of the top tax-saving investment options among salaried taxpayers and it works well even for self-employed taxpayers. Further, tax deductions for investments in NPS are available under both new and old income tax regimes. If you are wondering how to avail of tax deductions for your NPS investment, read here.
What are the tax deductions that you claim for investing in NPS?
You can claim tax deductions against NPS under three sections of the Income-tax Act, 1961 in India: Sections 80CCD (1), 80CCD (1B), and 80CCD (2). Here is a look at each one of them.
NPS tax benefits under Section 80CCD (1):
Section 80CCD (1) of the Income-tax Act, 1961, allows for a deduction from your gross total income for contributions made to the NPS. Both salaried and self-employed taxpayers can avail of the deduction under section 80CCD(1) for investments in NPS. The maximum deduction under this section is — 10% of your salary (Basic + DA) for salaried individuals or 20% of gross total income for self-employed, subject to a ceiling of Rs 1.5 lakh in a financial year. Do remember that this limit is within the overall ceiling of Rs 1.5 lakh under Section 80 CCE. The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD should not exceed Rs 1.5 lakh.
NPS tax benefits under Section 80CCD (1B):
Section 80CCD (1B) offers an additional deduction of up to Rs 50,000 for contributions to NPS. This is over and above the limit of Rs 1.5 lakh available under Section 80CCD (1), providing a potential tax-saving opportunity for both salaried and self-employed taxpayers.
NPS tax benefits under Section 80CCD (2):
Section 80CCD (2) pertains to the employer’s contribution to an employee’s NPS account. So, it is available only for the salaried taxpayers. “The amount of deduction cannot exceed 14% of the salary in the case of Central Government employees and 10% in the case of any other employees,” says Adhil Shetty, CEO, of Bankbazaar.com. Many employees in the private sector get the flexibility to structure their salary in such a way that their employer contributes to NPS by deducting it from their overall cost-to-company (CTC) package.The maximum employer’s contribution on which a salaried employee can get this deduction is Rs 7.5 lakh. This limit includes contribution towards EPF and super annulation fund also.
How much a salaried and self-employed can claim tax deductions for investing in NPS
| Section | Eligibility | Maximum Deduction | Additional Information | Deductible Claim |
| 80CCD(1) | Salaried Individuals and Self-employed | 10% of salary (Employees) | Deduction up to Rs 1.5 lakhs per financial year | Rs 2 lakh |
| 20% of gross income (Self-employed) | ||||
| 80CCD(1B) | Salaried Individuals and Self-employed | Rs 50,000 | Additional deduction, over and above 80CCD(1) | |
| 80CCD(2) | Salaried individuals | Up to 14% of Salary (Govt.) | Employer’s contribution, additional to 80CCD(1) deductions | Rs 7.5 lakh |
| Up to 10% of Salary (Others) |
NPS for salaried and self-employed taxpayers under old and new income tax regimes
Salaried taxpayers can avail a tax benefit of up to Rs 2 lakh under Section 80CCD (1) and Section 80CCD (1B). Further, they have the option to claim an additional deduction under Section 80CCD (2) based on the conditions mentioned above.
Self-employed taxpayers can avail of a tax deduction of Rs 1.5 lakh under Section 80CCD (1). They can avail an additional deduction of Rs 50,000 under Section 80CCD (1B). Therefore, self-employed taxpayers can avail a maximum tax benefit of Rs 2 lakh for investing in NPS.
If you are opting for the old tax regime, you can claim the deductions under Section 80CCD (1), Section 80CCD (2) and Section 80CCD (1B). However, if you are opting for the new income tax regime, you have to let go of the deductions available under Section 80CCD (1) and Section 80CCD (1B). You can still claim the income tax deductions for contributions to NPS under Section 80CCD (2) in the new income tax regime.
“So, there is no tax benefit at all for self-employed individuals to invest in NPS if they choose the new tax regime,” says Kuldip Kumar, Partner Mainstay Tax Advisors LLP.
How much return can you get from NPS investments?
The returns from NPS are variable and depend on the specific plan that you choose. NPS offers four asset classes — Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds. Investors can access these asset classes through either the active or auto-choice route. The returns are directly linked to the performance of these underlying asset classes and their respective weights in the chosen portfolio. The flexibility of NPS allows investors to tailor their asset allocation based on risk tolerance and investment goals, influencing the potential returns on their contributions over the long term.
“As of January 5, 2024, equity pension fund managers have achieved impressive returns, nearing, or exceeding 25% over the past year. Additionally, corporate bond funds have delivered robust returns, reaching or surpassing 8%. Government securities funds have also performed well, providing returns exceeding 7.5%. These positive results indicate strong performance across different asset classes within the pension fund landscape, showcasing the potential for attractive returns for investors in both equity and fixed-income instruments,” says Nirav R Karkera, Head- Research, Fisdom
“The average annualised returns under NPS as of January 2024 are in the range of about 8% to 15%, depending on the asset class and allocation and the NPS fund manager,” says Akhil Chandna, Partner, Grant Thornton Bharat.
Should you invest in NPS to save on income tax?
Determining whether the National Pension System (NPS) is the best tax-saving option depends on individual financial goals and preferences. NPS stands out as a robust choice for long-term retirement-focused investments, offering flexibility in asset allocation, says Karakara.
NPS is a retirement-dedicated product that allows investors to take exposure to both equity and debt and also control asset allocation, says Dev Ashish, a SEBI Registered Investment Advisor and Founder of StableInvestor. “But unlike EPF and PPF, where the accumulated corpus at maturity is tax-free and allows unrestricted usage, NPS requires the mandatory purchase of an annuity worth a minimum of 40% of the accumulated NPS corpus. And the pension from this annuity is taxable. The remaining 60% is tax-free and available as a one-time lump sum payment.”
The NPS Scheme is ideal for individuals seeking increased returns with a readiness to embrace market risks, says Neeraj Agarwala, Partner, Nangia Andersen India.
