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Know All About National Pension Scheme Tax Benefits

Updated On Nov 27, 2021

The foundation for saving and investing activities is a set of financial goals; most people start investing to save money on taxes. Many people, however, want to live a financially healthy lifestyle but don't know where to start. Given the numerous investing possibilities accessible today, financial objectives should be concise, practical, and action-oriented.

The National Pension Program (NPS) is a government-sponsored scheme, making it a safer investment alternative for people. The programme began in January 2009 and was initially limited to government personnel. However, in 2009, the programme became available to everybody. This plan allows covered people to contribute to a pension account on a regular basis throughout their working lifetimes. To find out more about the National Pension Scheme, read on.

Types Of NPS Account

Following are the types of accounts that an individual can open under NPS -

  • Tier 1 Account

A perpetual retirement account with no withdrawals is known as a Tier I account. Prior to 2011, it had a lock-in period that lasted until the participant reached the age of 60. However, the PFRDA, the governing body, made a few changes in 2011. According to their new regulations, the relevant persons would be eligible for early retirement from the military after 15 years of service.

Premature withdrawals are made as repayable advances, which is unusual. A person can also withdraw up to 50% of their contribution after 25 years of service. Individuals will be able to use these withdrawals to help them deal with a range of situations that require immediate financial assistance, such as serious sickness.

  • Tier 2 Account

Individuals having a Tier 2 Account are able to withdraw an unlimited amount of money from their accounts. It works in the same way as a savings account. The key distinction is that taking money out of this account is more difficult than taking money out of a savings account.

Benefits Of National Pension Scheme

Following are some listed features of the National Pension Scheme -

  • Returns

Equities receive a share of the NPS (this may not offer guaranteed returns). However, NPS provides an insured individual with significantly better returns than standard tax-saving investments such as the PPF.

This programme has been running for more than a decade and has produced annualised returns of 8% to 10%. If an insured individual is dissatisfied with the fund's performance, then they can replace their fund manager under NPS.

  • Risk Assessment

The National Pension Scheme now has a limit on equity investment ranging from 75 percent to 50 percent. This limit is set at 50% for government employees. Beginning from the year an insured individual becomes 50 years old, the equity portion of the portfolio will be reduced by 2.5 percent per year in the prescribed range.

The limit, on the other hand, is set at 50% for investors over the age of 60. This protects the funds from stock market volatility by stabilising the risk-return equation in investors' best interests.

When compared to other fixed-income schemes, NPS has better earning potential.

  • Withdrawal Rules After 60

An insured individual cannot withdraw their whole funds of the NPS system after retirement, contrary to popular assumption. In order to obtain a regular pension from a PFRDA-registered insurance business, an individual must set aside at least 40% of their funds.

The remaining 60% is now tax-free. According to the most recent government announcement, the whole NPS withdrawal funds are tax-free.


An individual should consider participating in the NPS plan if the foregoing benefits match their respective risk profile and investment aim. If an individual wants greater equity exposure, however, there are several mutual funds that appeal to investors from many walks of life.

Also Read: Senior Citizens Savings Scheme - Eligibility, Features, Details, etc

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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