National Pension System (NPS) is a government-sponsored pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

It allows employees (public, private) and self-employed individuals to contribute regularly towards a retirement corpus, which they can withdraw partly at retirement, while the rest is used to buy a pension (annuity).

Tax Benefits under the Income Tax Act (Post-Budget 2025):

1. Employee’s Contribution:

• Section 80CCD(1):

  • Deduction up to 10% of salary (Basic + DA) for salaried individuals.

  • For self-employed individuals, deduction up to 20% of gross total income.

  • This deduction is part of the overall limit of ₹1.5 lakh under Section 80CCE.

• Section 80CCD(1B):

  • Additional deduction of ₹50,000, over and above the ₹1.5 lakh limit under Section 80C.

  • Available to both salaried and self-employed individuals.

2. Employer’s Contribution:

• Section 80CCD(2):

  • Employer’s contribution up to 10% of salary (Basic + DA) is deductible for the employee.

  • For Central Government employees, this limit is enhanced to 14%.

  • This deduction is over and above the limits under Sections 80C and 80CCD(1B).

ax Treatment on Withdrawal:

• Lump Sum Withdrawal:

  • Upon retirement, up to 60% of the accumulated corpus can be withdrawn as a lump sum.

  • This amount is exempt from tax under Section 10(12A).

• Annuity Purchase:

  • The remaining 40% must be used to purchase an annuity, which provides regular pension income.

  • Annuity income is taxable in the year of receipt under the head “Income from Other Sources.”