NPS gives three deductions. 80CCD(1) (your own contribution, up to 10% of salary or 20% of gross income) sits inside the ₹1.5 lakh Section 80C ceiling. 80CCD(1B) adds an extra ₹50,000 on top. 80CCD(2) — your employer's contribution, up to 14% of salary — is the only one that also works in the new regime. At age 60, 60% of the corpus is tax-free u/s 10(12A); the 40% used to buy an annuity is tax-free at purchase but the pension you later receive is taxable.
NPS Deductions — 80CCD(1), (1B) & (2)
NPS is taxed under the three sub-sections of Section 80CCD. Only a Tier 1 account qualifies for these deductions. The overall ₹1.5 lakh cap that limits 80CCD(1) is the same Section 80C / 80CCE ceiling shared with PPF, ELSS, life insurance and the rest.
| Section | Who contributes | Limit | Old regime | New regime |
|---|---|---|---|---|
| 80CCD(1) | You (salaried / self-employed) | 10% of salary or 20% of gross income, within ₹1.5 L | Yes | No |
| 80CCD(1B) | You (Tier 1) | ₹50,000 over & above ₹1.5 L | Yes | No |
| 80CCD(2) | Your employer | 14% of salary (govt & private) | Yes | Yes |
Salary = basic + DA. Employer 80CCD(2) is over and above the ₹1.5 L limit and is not counted in your ₹2 L personal cap. Verified on incometax.gov.in / npstrust.org.in for FY 2025-26.
Budget 2024 raised the 80CCD(2) employer-contribution limit from 10% to 14% of salary for private-sector employees too (it was already 14% for central-government employees), effective FY 2024-25. This 14% deduction is available in the new regime, making salary-linked employer NPS one of the few tax breaks that survive there.
What Survives in the New Tax Regime
If you have moved to the new tax regime, your own NPS deductions (80CCD(1) and the ₹50,000 80CCD(1B)) are gone. Only the employer contribution under 80CCD(2) remains — so structuring part of your CTC as employer NPS is the main way to still save tax through NPS.
Old regime — your own NPS
- 80CCD(1): part of the ₹1.5 L 80C basket
- 80CCD(1B): extra ₹50,000 on top
- Total personal cap ≈ ₹2,00,000
- Employer 80CCD(2) still available separately
New regime — employer only
- 80CCD(1) & 80CCD(1B): not available
- 80CCD(2): up to 14% of salary
- Deducted before tax on salary income
- Best used by restructuring CTC with employer NPS
How the ₹50,000 Actually Saves Tax
Take a salaried person on the old regime, income ₹15 lakh, 30% slab, who has already used the full ₹1.5 lakh 80C limit with PPF/ELSS and then puts ₹50,000 into NPS Tier 1.
80CCD(1B) extra NPS
Employer 80CCD(2)
Add 4% health & education cess on the tax saved. Use the income-tax calculator to compare your liability under each regime, or read our old vs new regime guide before you decide.
Employer contributions to NPS + EPF + superannuation combined are tax-free only up to ₹7.5 lakh a year. Anything above that, plus the annual accretion (interest) on the excess, becomes a taxable perquisite in your hands — watch this if you have a high basic salary.
How NPS Withdrawal Is Taxed
NPS is often called EEE-lite: contributions and growth are tax-free, and the maturity lump sum is tax-free, but the annuity (pension) is taxable when you receive it. Here is the treatment of each exit route.
| Withdrawal type | Amount | Tax status |
|---|---|---|
| Superannuation (age 60) — lump sum | Up to 60% of corpus | Tax-free u/s 10(12A) |
| Superannuation — annuity purchase | Min 40% of corpus | Tax-free at purchase; annuity income taxable |
| Partial withdrawal (house / illness / education etc.) | Up to 25% of your own contributions | Tax-free u/s 10(12B) |
| Premature exit (before 60) | 20% lump sum | Taxable at slab; 80% to annuity |
| Death of subscriber | Entire corpus to nominee | Tax-free |
Under the 2025 systematic-lump-sum option you may withdraw up to 80% as lump sum, but only 60% stays tax-free — the excess is taxable. Annuity/pension is always taxed at your slab in the year received.
- 1Age 60 corpusYour full accumulated NPS
- 260% lump sumTax-free u/s 10(12A)
- 340% to annuityTax-free at purchase
- 4Annuity incomeTaxed at slab yearly
Only the lump sum escapes tax. The pension you draw from the annuity is added to your total income and taxed at your applicable slab every year — many people forget this and under-estimate their retirement tax.
Tier 1 vs Tier 2 — Where the Benefit Lives
Pension account
- Mandatory, locked till age 60
- All 80CCD deductions available
- Partial withdrawal only for notified needs
- Maturity 60% tax-free, 40% annuity
Voluntary savings
- Optional, withdraw anytime
- No deduction on contributions*
- Taxed like a mutual fund on gains
- *Locked-in central-govt Tier 2 → 80C
✓NPS suits you if
- You want the extra ₹50,000 80CCD(1B) deduction
- Your employer offers 80CCD(2) NPS in CTC
- You are on the new regime and want a legal deduction
- You want a low-cost, long-horizon retirement corpus
!Think twice if
- You need liquidity before age 60
- You dislike the mandatory 40% annuity
- Your annuity pension will still be taxed at slab
- You have a high basic and may breach the ₹7.5 L cap
Not sure how much NPS to invest or which regime saves more? Get a CA to run your numbers.
Plan tax with a CA →- Section 80CCD & 10(12A)/(12B), Income-tax Act: incometax.gov.in
- Tax benefits & withdrawal rules: NPS Trust — npstrust.org.in
- 80CCD(2) raised to 14% (private sector) & retained in new regime: Budget 2024, eff. FY 2024-25
- ₹7.5 lakh combined employer PF+NPS+superannuation exemption cap
Disclaimer: This guide is general information based on the law and notifications in force when it was last updated. It is not professional advice for your case — rates, thresholds and due dates change, so check the current position or speak to our CA team before you act on it.