NPS in Old Tax Regime vs NPS in New Tax Regime

Planning for retirement often goes hand in hand with thinking about tax savings. If you’re considering the National Pension System (NPS) as part of your long-term financial strategy, understanding how it works under both the old tax regime and the new tax regime is crucial. Each framework offers different tax treatments that can impact how much you save today and how your retirement funds are taxed in the future.

Let’s explore the key differences between NPS under the two regimes and how you can align your retirement planning accordingly.

Understanding the National Pension System (NPS)

The National Pension System is a retirement-focused investment initiative backed by the Government of India. Its core purpose is to encourage disciplined long-term savings that support individuals during their post-retirement years.

There are two types of NPS accounts:

Tier I Account

Designed strictly for retirement purposes
Offers tax benefits under certain sections
Comes with withdrawal restrictions

Tier II Account

A voluntary investment option
Offers flexibility in deposits and withdrawals
Does not provide any NPS tax benefit

While Tier II can act as an additional savings tool, Tier I is the primary account considered for tax exemptions and retirement corpus building.

NPS Tax Benefits Under the Old Tax Regime

The old tax regime rewards investors who plan their finances and claim deductions across various eligible investments. NPS fits well in this landscape due to the following benefits:

Section 80C

You can claim deductions up to ₹1.5 lakh annually.
Your contributions to the Tier I account are included in this limit.
This section also covers other investments like the provident fund and life insurance

Section 80CCD(1B)

Offers an additional deduction of ₹50,000.
Exclusively applicable to contributions made to the Tier I account.
Over and above the ₹1.5 lakh cap under Section 80C.

Section 80CCD(2)

Applicable to employer contributions to NPS.
Non-government employees: up to 10% of basic salary + DA.
Government employees: up to 14%.
No upper monetary cap on this exemption.

Maturity & Withdrawal Taxation

Up to 60% of the corpus can be withdrawn tax-free at retirement.
At least 40% must be used to purchase an annuity plan.
Annuity payouts are taxed as per the individual’s income slab.

NPS Tax Benefits Under the New Tax Regime

The new tax regime simplifies the tax structure by offering lower slab rates. However, the trade-off is that it eliminates most deductions.

What You Miss Out

No deduction under Section 80C
No additional ₹50,000 exemption under Section 80CCD(1B)
These exclusions reduce the appeal of NPS as a tax-saving tool under the new regime.

What Remains

Employer contributions to Tier I under Section 80CCD(2) remain deductible.
This deduction is preserved across both regimes, highlighting its importance in retirement planning.

Maturity & Withdrawal Taxation

Remains identical to the old regime.
Lump-sum withdrawals up to 60% of the corpus remain tax-exempt.
Annuity income is taxed per the applicable slab.

Quick Comparison Table: NPS Tier 1 vs NPS Tier 2

Feature	NPS Tier 1	NPS Tier 2
Eligibility	Indian citizens aged between 18 and 70 years	Indian citizens who already have an NPS Tier 1 account
Nature of Account	Mandatory retirement account	Voluntary savings account (add-on to Tier 1)
Lock-in Period	Locked till the age of 60 (Partial withdrawals allowed after 3 years)	No lock-in period; funds can be withdrawn anytime
Tax Benefits	Contributions eligible for tax deductions under Section 80C and 80CCD	No tax benefits are available for contributions
Fund Transfer Flexibility	Can receive transfers from Tier 2 or EPF	Cannot transfer funds to Tier 1
Withdrawal Rules	Restricted withdrawals; conditions apply	Flexible withdrawals without restrictions

Choosing Between the Old and New Tax Regimes for NPS

Selecting between the two regimes depends on your broader financial landscape. Here are a few guidelines that may help.

Old Tax Regime May Suit You If:

You actively invest in tax-saving instruments.
Your deductions under 80C and 80CCD(1B) are significant.
You wish to reduce your taxable income with multiple exemptions.
You are comfortable managing different sections and proofs for claims.

New Tax Regime May Suit You If:

You prefer lower tax rates with no deduction hassle.
You do not claim many exemptions in your financial year.
Your employer contributes substantially to your NPS Tier I account.
You want simplicity in tax computation and filing.

Remember, the tax treatment at withdrawal remains similar, mainly in both regimes. The real difference lies in how your contributions are treated during your working years.

Key Takeaways

The choice between the old and new tax regimes for NPS depends on how you balance tax savings with long-term retirement goals. While the old regime offers broader deductions for personal contributions, the new regime provides simplicity and lower tax rates. Since employer contributions remain beneficial under both, it’s wise to assess your income, deductions, and investment habits before making a decision.

FAQs

1. Can I switch between the old and new tax regimes every year?

Yes, salaried individuals can choose between the old and new tax regimes each financial year while filing their income tax return.

2. Do Tier II NPS investments offer any tax benefits under either regime?

No, Tier II contributions are not eligible for tax deductions in either regime.

3. Is the employer’s contribution to NPS taxable in any regime?

Employer contributions are exempt under Section 80CCD(2) in both the old and new tax regimes, within the prescribed limits.

4. Which regime is better for someone with minimal other deductions?

If you do not claim other deductions, the new tax regime may be more beneficial due to its lower tax rates.

5. Does the annuity income from NPS get taxed after retirement?

Yes, the income received from an annuity purchased through your NPS corpus is taxable as per your applicable income slab in retirement.

NPS in Old Tax Regime vs NPS in New Tax Regime