Keeping in mind the evolving and ever-changing financial scenario of the world today, effective tax planning has become one of the most essential survival needs for increasing disposable income and ensuring long-term financial stability. Saving on income tax comes with a lot of benefits. Not only does it maximize the immediate in-hand pay, but it also allows individuals to invest more for future goals, including retirement. One of the most popular and low-risk investment options available to Indian taxpayers is the [National Pension System (NPS)](https://pensionbox.in/blog/National-Pension-Scheme). The NPS is an attractive tool that is regulated by the [Pension Fund Regulatory and Development Authority (PFRDA)](https://www.pfrda.org.in/). It comes with a multitude of advantages. For instance, it provides a structural retirement savings mechanism and also delivers various tax benefits. 

In this blog, we will explore the meaning of NPS, how it works, and some of the notable tax benefits it offers, which can help individuals save more. 

## Meaning and characteristics
 
The [National Pension System (NPS)](https://pensionbox.in/blog/National-Pension-Scheme) is a voluntary, defined contribution towards savings for retirement that enables patrons to make the right decision for the future by generating savings throughout their lives. The **NPS (National Pension Scheme)** is a great way to save for retirement. Anyone in the age group of 18–70 years, public or private employee, resident or non-resident, can become a part of the National Pension Scheme program. [Section 80CCD(2) of the Income Tax Act](https://www.bajajfinserv.in/section-80-ccd-2) covers the contribution of an employee to the NPS. [Section 80C of the Income Tax Act](https://cleartax.in/s/80c-80-deductions) covers the tax deduction of ₹1.5 lakh for self-contribution to the National Pension Scheme. [Section 80CCD(1B) of the Income Tax Act](https://cleartax.in/s/80c-80-deductions) covers the additional deduction of ₹50,000, which is allowed if a contribution is made towards the NPS. 

Hence, if you are planning your finances to save for the future and have a peaceful life after retirement, you must take this into account. 

## Types of NPS accounts

There are two types of investment accounts under NPS, namely NPS tier 1 and NPS tier 2 accounts.

- **1. Tier I account:** NPS Tier I accounts are mandatory and must be opened by every individual who wishes to be a part of the NPS scheme.
- **2. Tier II account:** The NPS Tier II account is optional. You can choose to open an NPS Tier II account after you have opened a Tier I account. NPS Tier II accounts come with various benefits.

For more clarity on the difference between these two types of NPS Accounts, kindly click [here](https://pensionbox.in/blog/Difference-between-NPS-Tier-I-and-Tier-II-Accounts)

## How does NPS help you save taxes?

### Deduction under Section 80CCD(1)

When individuals make contributions towards NPS, these contributions are eligible for a tax deduction under [Section 80CCD(1) of the Income Tax Act](https://www.policybazaar.com/income-tax/section-80ccd/). The limit for this deduction is 10% of the salary (basic + dearness allowance) for salaried individuals and 20% of gross income for self-employed individuals, subject to an overall cap of ₹1.5 lakh under [Section 80C](https://www.iciciprulife.com/insurance-library/income-tax/what-is-section-80c-of-income-tax-act).

### Additional Deduction Under Section 80CCD(1B)

Individuals can claim additional tax benefits under [Section 80CCD(1B)](https://cleartax.in/s/section-80-ccd-1b). This additional benefit has been launched by the government to encourage people to become a part of the NPS family. Contributions up to ₹50,000 per year under this section are eligible for a tax deduction over and above the ₹1.5 lakh limit under Section 80C. This implies that you can claim a total deduction of ₹2 lakh (₹1.5 lakh under Section 80C + ₹50,000 under [Section 80CCD(1B)](https://cleartax.in/s/section-80-ccd-1b).

### Employer’s Contribution Under Section 80CCD(2)

Contributions towards an employee's NPS account are also eligible for a tax deduction under [Section 80CCD(2)](https://www.goodreturns.in/section-80ccd-2-of-income-tax-act-s5.html). The contribution can be up to 10% of the salary (basic plus dearness allowance) and is not subject to the ₹1.5 lakh limit of [Section 80C](https://www.iciciprulife.com/insurance-library/income-tax/what-is-section-80c-of-income-tax-act). 

## NPS Partial Withdrawal

In NPS, partial withdrawals are permitted for certain specific purposes. These may include higher education, the marriage of children, the purchase or construction of a residential house, and the treatment of critical illnesses. Considering the current data, up to 25% of the contributions made by the subscriber are eligible for tax exemption. In the case of the death of an NPS subscriber, the nominee is eligible to claim the accumulated corpus. The whole corpus is paid to the nominee or legal heir, and there is no mandatory requirement to purchase an annuity. This amount is exempt from tax.

The NPS is one of the most effective and attractive investment tools available for salaried individuals. Not only does it help in building a retirement corpus at low risk, but it also offers various tax benefits. When an individual understands the provisions of tax deductions that can be claimed and strategically planned, they can upgrade their tax savings. This will ultimately result in a secure financial future.

Keeping in mind the evolving and ever-changing financial scenario of the world today, effective tax planning has become one of the most essential survival needs for increasing disposable income and ensuring long-term financial stability. Saving on income tax comes with a lot of benefits. Not only does it maximize the immediate in-hand pay, but it also allows individuals to invest more for future goals, including retirement. One of the most popular and low-risk investment options available to Indian taxpayers is the National Pension System (NPS). The NPS is an attractive tool that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It comes with a multitude of advantages. For instance, it provides a structural retirement savings mechanism and also delivers various tax benefits. 

NPS and Tax Saving Methods explained by PensionBox

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