Are NPS returns and maturity amount taxable

Are NPS returns and maturity amounts taxable?

The National Pension System (NPS) is an optional retirement planning scheme available to Indian citizens. The Government of India launched this scheme in January 2004 to assist government employees in saving for their retirement. However, the NPS scheme was opened to all sections in 2009.

You can invest in the NPS to build a corpus and ensure a steady income stream after retirement. By investing in NPS, you can also receive certain tax benefits under section 123 of the Income-tax Act, 2025 (earlier Section 80C) if you opt for the old tax regime. However, many people are sceptical of the tax breaks available on NPS investments and returns.

Let's get started with what NPS is first.

What is NPS?

The National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme that enables subscribers to make the best decisions for their future by making systematic savings throughout their working lives. The NPS aims to instil in citizens the habit of saving for retirement. It is an attempt to find a long-term solution to the problem of providing adequate retirement income to every Indian citizen.

Tax Provisions on NPS

Under the old tax regime, tax deductions of up to ₹2 lakhs every year can be claimed upon investment in the National Pension System. These deductions are not available under the new tax regime, which is now the default. NPS is often described as an EEE category investment plan, but that is only partly true: only 60% of the corpus taken as a lump sum at exit is tax-free, and annuity income is taxed at your slab rate.

To be eligible for the EEE category, an investment instrument must meet the following criteria. ‌

1. Tax deductions should be available for the amount invested.

2. The income generated by the investment should be exempt from taxation. ‌

3. On maturity proceeds, no tax should be levied.

There is, however, a small catch. Existing NPS rules allow for the withdrawal of up to 80% of the accumulated corpus at maturity. The remainder is invested in annuities to provide you with a steady stream of income after you retire. While there is no tax on money withdrawn at maturity, money received as an annuity after retirement is added to your taxable income.

For example, if the total accumulated corpus at maturity is ten lakhs, you can withdraw up to 80% of that amount, or eight lakhs, as a lump sum. Only 60%, or six lakhs, is tax-free; the other two lakhs is taxed at your income tax slab rate. The remaining 20%, or 2 lakhs, would be used to provide you with annuity income, which could be taxed. To see what your own corpus, lump sum and monthly pension could be, try the NPS calculator.

To conclude, NPS gives tax deductions on investment under the old tax regime, and 60% of the corpus taken as a lump sum at maturity is tax-free, but annuity income is taxable.

How can PensionBox help?

PensionBox allows you to create personalised retirement plans. We assist you in developing a strategy first, tracking your pension savings such as PF, and assisting with very flexible investments in the National Pension System. PensionBox makes it easy to plan, track, and invest for a secure retirement.

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