National Pension System (NPS): Full Tax Benefits, Returns & Withdrawal Rules (India 2025–26 Guide)

Planning for retirement isn’t optional — it’s essential.

The National Pension System (NPS) is one of the most tax-efficient and disciplined retirement savings instruments in India. It combines tax benefits, market-linked returns, and flexibility to build a retirement corpus.

This guide covers:

• NPS tax benefits under Sections 80CCD(1), 80CCD(1B), 80CCD(2)

• Contribution limits

• Returns expectation

• Withdrawal rules

• Exit & maturity framework

• How NPS fits into overall financial planning

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📌 What Is NPS?

The National Pension System (NPS) is a voluntary, government-backed retirement savings scheme designed to provide long-term retirement income security.
NPS lets you invest in:

• Equity

• Corporate bonds

• Government Securities

• Alternative investment funds (AIFs) via specific mandates

Who can invest?

• Salaried employees

• Self-employed individuals

• NRIs (with specific eligibility)

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🧾 NPS Contribution Structure

NPS has two accounts:

🧑‍💼 Tier I Account

• Mandatory for tax benefits

• Locked-in till retirement (except partial withdrawals on specific conditions)

• Best for long-term saving

💼 Tier II Account

• Optional savings account

• No tax benefits (unless specified for govt employees)

• Liquid, no lock-in

WonderTax recommends using Tier I as your primary retirement engine.

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🧮 Tax Benefits for NPS (FY 2025–26)

🔹 Key Points

80CCD(1B) is a super tax benefit over and above the ₹1.5 lakh 80C limit — meaning you can save more tax by contributing to NPS.

Employer NPS contributions (80CCD(2)) also reduce your taxable salary directly at source without affecting 80C limits.

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📊 Examples — Tax Benefit with NPS

Example 1 — Salaried Individual

• Salary: ₹12,00,000

• NPS Contribution: ₹1,00,000

• Employer NPS Contribution: ₹80,000

Tax benefits:

• ₹1,00,000 under 80CCD(1)

• ₹50,000 under 80CCD(1B)

• ₹80,000 under 80CCD(2)
  Total Deductions From Taxable Income = ₹2,30,000

This significantly reduces tax liability.

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📈 Expected Returns on NPS

NPS returns are market-linked and historically may range ~8%–12% annualized over the long term, depending on:

• Asset allocation

• Equity exposure

• Government Securities performance

• Corporate bond yields

Long-term horizon (15–30 years) yields stronger compounding benefits.

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🗓 NPS Withdrawal Rules (2025–26)

✔ Before Retirement (Partial Withdrawal)

You can withdraw up to 25% of your own contribution for:

• Child education

• Marriage

• Critical illness

• First home purchase

Conditions:

• Minimum 3 years since joining NPS

• Specific documentary proof required

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✔ At Retirement (Service ≥ 60 years)

Maturity Benefits:

• At least 40% must be used to purchase annuity (for pension)

• Up to 60% can be withdrawn tax-free as lump sum

This tax exemption at maturity makes NPS one of the best retirement vehicles in India.

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✔ Early Exit (< 60 years)

If you exit NPS before 60:

• Up to 20% of total corpus tax-free

• Mandatory annuity purchase with remaining 80%

Early exit is typically less tax-efficient than exiting at 60.

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⚖️ NPS & New vs Old Tax Regime

Tip: If you want full NPS benefits (both employee and employer), the Old Regime often remains preferable.

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📋 How to Open an NPS Account (Step-by-Step)

1. Visit official NPS portal (eNPS) or authorized bank/NSDL collection centre

2. Provide KYC: PAN, Aadhaar, bank details

3. Choose Tier-I & optionally Tier-II

4. Choose your Pension Fund Manager

5. Select Active or Auto Choice investment pattern

6. Submit initial contribution (even ₹1,000 is valid)

WonderTax can guide you through this entire setup.

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⚠️ Common Mistakes Savers Should Avoid

❌ Ignoring 80CCD(1B) extra deduction
❌ Exiting NPS early without planning
❌ Not using employer contribution effectively
❌ Treating NPS like a short-term investment
❌ Choosing random funds without asset allocation strategy

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❓ Frequently Asked Questions (Schema-Ready)

Q1: Is NPS taxed on maturity?
Up to 60% withdrawal is tax-free at maturity; 40% used for annuity isn’t taxed as income.

Q2: Can I contribute to NPS after retirement?
Yes — you can continue NPS contributions until age 70.

Q3: Are NPS funds safe?
NPS is regulated by PFRDA and has diversified mandates; safety depends on your asset allocation.

Q4: Can NRIs invest in NPS?
Yes — NRI eligibility exists with compliance requirements.

Q5: Can I switch Pension Fund Managers?
Yes — NPS allows switches and changes in asset allocation.

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📢 Call to Action (CTA)

Maximise your retirement corpus & tax savings with smart NPS investing.
Talk to a WonderTax expert for personalised strategy.

👉 https://wondertax.in/contact-us