As we progress through different stages of life, one of the most crucial financial decisions is planning for a secure and independent future. The National Pension System (NPS), launched by the Government of India, is not only a powerful financial planning tool but also one of the most tax-efficient investments available in 2025. Millions of Indians, from salaried professionals to self-employed individuals, are using NPS to build their retirement corpus while enjoying significant NPS tax benefits.

What is NPS?

NPS is a voluntary retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS investments are allocated across a mix of:

• Equity (E): High growth potential with higher risk.
• Corporate Bonds (C): Moderate risk with steady income.
• Government Securities (G): Stable, low-risk returns.
• Alternative Investment Funds (AIF): Highest Risk amongst the four with potential of high returns.

This diversified allocation makes NPS a long-term wealth creation tool.

The biggest advantage of NPS is its EEE (Exempt-Exempt-Exempt) tax structure:

• Exempt at Investment: Contributions are tax-deductible depending on the limits of the tax regime selected.
• Exempt on Growth: Returns grow tax-free while invested.
• Exempt at Withdrawal (capped): At retirement, up to 60% of the corpus can be withdrawn tax-free, while 40% must be used to buy an annuity that provides lifelong pension.

NPS Tax Benefits in 2025

Tax Benefits Under the Old Tax Regime

The old tax regime continues to provide maximum deductions on NPS contributions:

• Section 80 CCD(1): Deduction within the overall Section 80C cap of ₹1.5 lakh on the self-contribution of the subscriber to NPS.
• Section 80CCD(1B): Additional exclusive deduction on self-contribution to NPS up to ₹50,000.
• Section 80CCD(2): Employer contributions (up to 10% of salary) are deductible. Salary components considered here will be Basic Salary and Dearness Allowance (if applicable)
• Withdrawal Benefits: Up to 60% of the retirement corpus can be withdrawn tax-free.

Together, you can claim up to ₹2 lakh in deductions under the old tax regime on self-contributions.

Tax Benefits Under the New Tax Regime (2025)

The new tax regime simplifies taxation, but personal deductions are limited. However, NPS still retains important advantages for salaried individuals under Section 80CCD(2):

• Employee Contributions: Not deductible.
• Employer Contributions: Deductible up to 14% of salary (Basic + Dearness Allowance (if applicable)).
• Withdrawal Benefits: Continue unchanged — up to 60% tax-free withdrawal

Even under the new regime, employer contributions to NPS remain tax-free, making it one of the most effective employer-sponsored benefits.

How NPS Withdrawals are Taxed

• Upto 60% of your NPS corpus: Tax-free on retirement.
• 40% annuity purchase: Mandatory, and the pension received is taxable as per your income slab. However, the corpus used to purchase this annuity is exempt from GST.

This structure ensures both liquidity (through the tax-free corpus portion) and stability (through annuity income in the form of pension).

Tips to Maximise NPS Tax Benefits

• Self-contribute if Old Tax Regime is opted: You can maximize deductions on personal and employer contributions.
• Leverage Employer Contributions: Claimable in both regimes and can significantly reduce taxable income. LIC Pension Fund can handhold Corporates to enable this for their employees.
• Plan Withdrawals Smartly: Upto 60% is tax-free at retirement — structure your withdrawals accordingly.
• Pair NPS with LIC Annuities: Get guaranteed monthly income in addition to your tax-efficient corpus.
• Stay Disciplined: Consistent contributions, even small, compound into a large retirement fund.

FAQs on NPS Tax Benefits in 2025

Conclusion

In 2025, the National Pension System (NPS) remains one of the best tax-saving investment options in India. Under the old tax regime, you can save up to ₹2 lakh in taxes through deductions on self- contributions, enjoy tax-free growth apart from the exemptions on the employee contribution under section 80 CCD(2). Under the new tax regime, employer contributions continue to enjoy tax benefits under 80 CCD(2), ensuring steady accumulation of retirement wealth.

By combining NPS with LIC annuity products, you can create a tax-efficient, stable, and reliable retirement plan — helping you enjoy a stress-free and financially secure retirement.