NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Other Products

Taxation of Retirement Products: EPF, PPF and NPS Explained

Updated 11 October 2026 · Fact-checked

Retirement products are taxed at three points: contribution, interest and withdrawal. PPF is fully exempt at all three (EEE). EPF is mostly exempt, with limits on high contributions and early withdrawal. NPS gives extra deductions on contribution, an exempt lump sum of up to 60% on exit, and taxable annuity income.

Understand Taxation of Retirement Products: EPF, PPF and NPS

Every retirement product can be tested at three points: when you put money in, while it grows, and when you take it out. Tax professionals call this the E-E-E (exempt-exempt-exempt) or E-E-T pattern. The first letter is the contribution, the second is the interest or growth, and the third is the withdrawal.

PPF is the cleanest case. Your deposit qualifies for deduction under section 80C (old regime only), the interest is exempt, and the maturity amount is exempt. That is full EEE. The deposit limit is ₹1,50,000 a year, and the term is 15 years, extendable in blocks of 5 years.

EPF is mostly EEE but has conditions. Your own contribution qualifies under 80C (old regime). Interest is exempt, except interest on your contributions above ₹2,50,000 in a year, which is taxable. The limit is ₹5,00,000 if the employer makes no contribution. The limit applies to your contribution only. The taxable interest is tracked in a separate taxable-contribution account, which also earns interest in later years. Withdrawal is exempt after 5 years of continuous service. Before that, it is taxable unless an exception applies, such as ill health, closure of the employer's business or transfer to another PF account.

NPS has the most deduction layers. Section 80CCD(1) covers your own contribution, section 80CCD(1B) gives an extra ₹50,000, and section 80CCD(2) covers your employer's contribution.

On exit at 60, the split between lump sum and annuity follows the PFRDA exit rules in force at the time. Under the revised rules for non-government subscribers, at least 20% of the corpus must buy an annuity and up to 80% can be taken as a lump sum. Check the current percentage in your workbook or in the question, because these rules have changed over time.

For tax, the exemption on the lump sum is up to 60% of the corpus, subject to the conditions of section 10(12A) (and section 10(12B) for partial withdrawals). Do not assume an exemption above 60% unless the question says so. The annuity income is taxable in your hands.

The regime matters. The new regime allows almost no deductions, but the employer's NPS contribution under 80CCD(2) is still allowed. Always ask whether the question says old or new regime, who made the contribution (you or your employer), and whether the employee is a government or non-government employee.

Key formulas to remember

PPF tax status: PPF = EEE (deposit up to ₹1,50,000 a year; interest exempt; maturity exempt); The 80C deduction on deposit is available only under the old regime. Interest and maturity are exempt regardless of regime.
EPF interest taxability: Interest on employee contribution above ₹2,50,000 a year is taxable (₹5,00,000 if the employer does not contribute); Only the interest on the excess is taxed. Interest on the contribution within the limit stays exempt. The taxable interest is worked out on a separate taxable-contribution account, which also carries interest accruing in later years.
EPF withdrawal: Continuous service of 5 years or more = exempt; less than 5 years = taxable, with exceptions; Exceptions include ill health, employer's business closure and transfer to another PF account.
Employer contribution to EPF: Employer contribution exempt up to 12% of salary (basic + DA); Employer contributions to EPF, NPS and superannuation taken together above ₹7,50,000 a year are taxable as a perquisite. In a question, use the employer EPF contribution that is given. Do not assume 12% unless the question says so.
NPS 80CCD(1): Employee: up to 10% of salary (basic + DA); self-employed: up to 20% of gross total income; within the overall ₹1,50,000 limit of section 80CCE; Old regime only. It shares the ₹1,50,000 limit with 80C.
NPS 80CCD(1B): Additional deduction up to ₹50,000 for your own NPS contribution; This is over and above the ₹1,50,000 limit. Old regime only.
NPS 80CCD(2): Employer contribution deductible up to 10% of salary (basic + DA) under the old regime for non-government employees; up to 14% under the old regime for central and state government employees; up to 14% under the new regime for all employees; It sits outside the ₹1,50,000 limit. It is allowed in both regimes. The employer contribution is added to your salary first, then deducted. Always check the employee type and the regime.
NPS exit at 60: Lump sum and annuity split as per the PFRDA exit rules in force (non-government subscribers, revised rules: minimum 20% annuity, up to 80% lump sum); tax exemption on the lump sum up to 60% of the corpus under section 10(12A) conditions; annuity income is taxable; PFRDA has revised exit options over time, so check the current minimum annuity percentage. Follow the rule given in the current workbook or question. Do not assume an exemption above 60% unless the question says so.

How to solve Taxation of Retirement Products: EPF, PPF and NPS questions

Use the same checklist for any question on EPF, PPF or NPS. It stops you mixing up the three products.

1Identify the product: EPF, PPF, NPS or a similar scheme such as Sukanya Samriddhi or SCSS.
2Identify the stage being asked about: contribution, interest or withdrawal.
3Check the tax regime and who contributed: you or your employer. This decides which section applies.
4Apply the rule and its limit exactly: ₹1,50,000 for 80C, ₹50,000 for 80CCD(1B), 10% or 14% for the employer under 80CCD(2), ₹2,50,000 for EPF interest.
5If numbers are given, compute the limit first (for example, 10% of salary) and then take the lower of the limit and the actual contribution.
6Check the withdrawal conditions: 5 years of service for EPF, 60% exempt for NPS.
7Match the result to the option that states the rule with its condition, not just the general idea.

Quickest way: EEE or EET: three-letter shortcut

When to use it: Use it for conceptual MCQs that ask for the tax status of a product.

Remember PPF = EEE with no conditions on interest or maturity.
Remember EPF = EEE with conditions: high-contribution interest is taxable, and early withdrawal may be taxable.
Remember NPS = deduction on entry, growth exempt, 60% exempt on exit, annuity taxable.
For the NPS deduction, think of three buckets: own (80CCD(1)), extra ₹50,000 (80CCD(1B)) and employer (80CCD(2)).
Eliminate any option that says all withdrawals are taxable or that PPF interest is taxable.

Common mistakes in Taxation of Retirement Products: EPF, PPF and NPS

Saying the extra ₹50,000 NPS deduction is part of the ₹1,50,000 limit.
Students see the combined limit under 80CCE and assume everything shares it.
Fix: Section 80CCD(1B) is separate and additional. Section 80CCD(2) is also outside the ₹1,50,000 limit.
Treating the whole EPF interest as taxable once contribution crosses ₹2,50,000.
The rule is remembered as a cap on the account, not on the interest on the excess.
Fix: Only the interest on the contribution above the limit is taxed. The rest remains exempt.
Thinking EPF withdrawal after 5 years is taxable.
Confusion with the 5-year lock-in of tax-saving FDs or with the older rules for premature withdrawal.
Fix: Withdrawal after 5 years of continuous service is exempt. The tax risk is before 5 years.
Applying 80C and 80CCD(1) deductions under the new regime.
Students forget that most Chapter VI-A deductions are not available in the new regime.
Fix: Under the new regime, the main retirement deduction left is the employer's NPS contribution under 80CCD(2). Check the regime first.
Treating the entire NPS corpus as tax-free at maturity.
NPS is compared with PPF and assumed to be EEE.
Fix: Only the lump sum up to 60% is exempt under the traditional rule. Annuity income is taxed at your slab rate.
Using the same percentage limit for the employer's NPS contribution in all cases.
The 10% and 14% limits are mixed up.
Fix: Use 10% under the old regime for non-government employees. Use 14% under the new regime for all employees, and for central and state government employees. Always on basic plus DA.

Worked examples

Example 1

Anita is a non-government employee. Her basic plus DA is ₹12,00,000 a year. Her employer contributes ₹1,50,000 a year to her NPS account. What is the deduction under section 80CCD(2) under the old regime and under the new regime?

Show the solution

Anita is a non-government employee, so the old regime limit is 10% of basic plus DA. The new regime limit is 14% for all employees.
Old regime limit: 10% of ₹12,00,000 = ₹1,20,000.
Actual employer contribution = ₹1,50,000. Take the lower: ₹1,20,000. So the deduction is ₹1,20,000 under the old regime.
New regime limit: 14% of ₹12,00,000 = ₹1,68,000.
Actual contribution ₹1,50,000 is lower than ₹1,68,000. So the deduction is ₹1,50,000.
Check the perquisite limit. The problem gives no employer EPF or superannuation figure, so only the NPS contribution of ₹1,50,000 is tested against the ₹7,50,000 limit. It is well below the limit, so no perquisite tax arises.

Answer: ₹1,20,000 under the old regime and ₹1,50,000 under the new regime.

Exam tips

Read the question for regime and for the contributor (you or the employer) before choosing a section.
Know the limits exactly: ₹1,50,000, ₹50,000, ₹2,50,000 and ₹7,50,000. Trap options change one number.
For status questions, remember that PPF is EEE without conditions, while EPF and NPS have conditions.
For NPS withdrawal, the keywords are 60% lump sum exempt and annuity taxable. Check the current rule given in your workbook.
Expect small-savings comparisons. Sukanya Samriddhi gets EEE treatment. SCSS gets an 80C deduction but taxable interest.

Practice questions from Taxation of Other Products

Taxation of Retirement Products: EPF, PPF and NPS: frequently asked questions

What is the EEE tax status of PPF?

EEE means the deposit, the interest and the maturity amount are all exempt. The deposit deduction under 80C is available only under the old regime. Interest and maturity remain exempt in both regimes.

Is EPF withdrawal taxable?

Withdrawal after 5 years of continuous service is exempt. Before that, it is taxable unless an exception applies, such as ill health, employer closure or transfer to another PF account. Interest on contributions above the annual limit is taxed separately.

What are the tax benefits of NPS under section 80CCD?

Section 80CCD(1) covers your own contribution within the 80CCE limit of ₹1,50,000. Section 80CCD(1B) gives an extra ₹50,000. Section 80CCD(2) covers your employer's contribution within 10% or 14% of salary and sits outside the ₹1,50,000 limit.

What is the difference between EPF, PPF and NPS taxation?

PPF is fully exempt on deposit (old regime), interest and maturity. EPF is mostly exempt but taxes interest on high contributions and early withdrawals. NPS offers the widest deductions, with a 60% exempt lump sum and a taxable annuity.