NPS Tax Deductions and Claim Procedures

Introduction

The National Pension System (NPS) is a structured retirement savings scheme aimed at providing financial security and tax benefits to Indian citizens. It caters to both individual subscribers and salaried employees, offering flexible investment options. With its blend of affordability, portability, and attractive tax deductions, NPS has become a popular choice for long-term wealth creation. This article outlines the various tax benefits available under NPS and offers step-by-step guidance on how to claim these deductions while filing your Income Tax Return (ITR)

An Overview of the National Pension System (NPS)

The National Pension System (NPS) is a government-backed retirement savings scheme aimed at helping Indian citizens build long-term financial security. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers a market-linked investment approach, allowing individuals to grow their retirement corpus over time. Its user-friendly structure makes retirement planning accessible, while offering attractive tax benefits that help reduce taxable income.

Tax Deductions Under the National Pension System (NPS)

The National Pension System (NPS) offers a range of tax benefits to its subscribers. Below is a breakdown of the key deductions available under various sections of the Income Tax Act:

1. Deduction Under Section 80CCD(1)

Subscribers can claim a tax deduction of up to 10% of their salary (Basic + Dearness Allowance) under Section 80CCD(1), subject to an overall ceiling of ₹1.5 lakh under Section 80CCE. For self-employed individuals, the deduction is limited to 20% of gross income, also within the ₹1.5 lakh cap.

2. Additional Deduction Under Section 80CCD(1B)

An additional deduction of up to ₹50,000 is available exclusively for contributions made to the NPS Tier I account under Section 80CCD(1B).
This is over and above the ₹1.5 lakh limit under Section 80CCE, making it a unique tax-saving opportunity not offered by most other investment options.
Even existing government employees can contribute extra through any Point of Presence – Service Provider (POP-SP) to avail of this benefit.

3. Deduction Under Section 80CCD(2)

This section provides a tax benefit on employer contributions to an employee’s NPS account.

For Central Government employees: Up to 14% of salary (Basic + DA) is deductible.
For other employees: Deduction is allowed for employer contributions up to 10% of salary.
Importantly, this benefit is over and above the limits of Section 80C and 80CCD(1B), making it highly valuable for salaried individuals in the corporate sector.

Other Tax Benefits Under NPS

In addition to the above deductions, NPS offers tax relief during withdrawals and annuity investments:

.Tax Exemption on Partial Withdrawals

Subscribers can make partial withdrawals from their Tier I account for specific reasons such as education, medical emergencies, or home purchase.
These withdrawals are fully exempt from tax under Section 10(12B) of the Income Tax Act.

. Tax Exemption on Annuity Purchase

At the time of retirement, the amount used to purchase an annuity from the NPS corpus is exempt from tax.
However, pension income received from the annuity in subsequent years is taxable as per the individual’s income tax slab.

. Tax Exemption on Lump-Sum Withdrawal

Upon retirement or exit, up to 60% of the NPS corpus withdrawn as a lump sum is exempt from tax, offering significant tax savings on maturity

How to Claim Tax Deductions Under NPS

To fully benefit from tax deductions available under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act, follow these steps while filing your Income Tax Return (ITR):

Step 1: Log in to the Income Tax e-Filing Portal

Go to the Income Tax e-Filing portal and log in using your PAN, Aadhaar, or registered credentials.

Step 2: Choose the Appropriate ITR Form

Select the correct ITR form based on your income source:

Salaried individuals: ITR-1 or ITR-2
Self-employed individuals: ITR-3 or ITR-4

Step 3: Declare Your NPS Contributions

Navigate to the Chapter VI-A section of the ITR form to claim deductions:

Section 80CCD(1):
Enter the amount contributed to your NPS Tier I account.
- Limit: Up to 10% of salary (Basic + DA) or 20% of gross income (for self-employed)
- Subject to a combined cap of ₹1.5 lakh under Section 80CCE
Section 80CCD(1B):
Declare additional contributions (beyond ₹1.5 lakh) made to your Tier I account.
- Limit: Up to ₹50,000
- This is an exclusive deduction, over and above the 80C limit
Section 80CCD(2):
Enter your employer’s contribution to NPS
- Limit: Up to 14% of salary (Basic + DA) for government and non-government employees
- This deduction is in addition to Sections 80CCD(1) and 80CCD(1B)

Step 4: Verify the Details

Cross-check all entries with your NPS transaction statement, Form 16, and salary slips to ensure accuracy.

Step 5: Retain Supporting Documents

Though uploading documents isn’t required during e-filing, retain the following for future reference or audit:

NPS contribution statements
Form 16 from your employer
Salary slips indicating employer contributions (if applicable)

Step 6: File and Verify Your ITR

Once all details are filled in, submit your ITR and complete verification either:

Electronically (via Aadhaar OTP, Net Banking, etc.), or
By sending a signed ITR-V to the CPC, Bengaluru

About the Author

shivani

Shivani is a seasoned content writer with expertise in business registration, tax laws, trademark regulations, and corporate compliance. His articles provide clear, practical guidance that helps businesses confidently navigate complex legal and regulatory landscapes.

June 10, 2025