NPS tax benefits explained
Updated 11 October 2026
The National Pension System (NPS) offers three separate tax deductions: your own contribution (within the ₹1,50,000 limit of 80C), an extra ₹50,000 for your own contribution over and above that, and the employer's contribution of up to 14% of basic pay plus DA. Only the employer's share is deductible under the new tax regime. Under the Income-tax Act, 2025, all three now sit in section 124, though the old names 80CCD(1), 80CCD(1B) and 80CCD(2) are still widely used.
The three deductions
| Old name | What it covers | Limit | Old regime | New regime |
|---|---|---|---|---|
| 80CCD(1) | Your own contribution to NPS Tier I | 10% of basic + DA (20% of gross income if self-employed), inside the ₹1,50,000 80C cap | Yes | No |
| 80CCD(1B) | Your own extra contribution | ₹50,000, over and above ₹1,50,000 | Yes | No |
| 80CCD(2) | Employer's contribution | 14% of basic + DA in the new regime; in the old regime 14% for government employers and 10% for others | Yes | Yes |
The employer's contribution is first shown as part of your salary and then deducted, so it does not add to your tax as long as it stays within the limit. One more cap applies: the employer's contributions to EPF, NPS and superannuation together are tax-free only up to ₹7,50,000 a year. Above that, the excess is taxed as a perquisite.
For central government employees
Central government employees who joined on or after 1 January 2004 are covered by NPS unless they opted for the Unified Pension Scheme. The employee contributes 10% of basic pay plus DA and the government contributes 14%. The 10% counts under 80CCD(1) within ₹1,50,000. The government's 14% is deductible under 80CCD(2) in both regimes. Anything you put in voluntarily beyond that can use the extra ₹50,000 of 80CCD(1B), but only in the old regime.
His own NPS deduction = 10% × ₹9,60,000 = ₹96,000 a year (counts under 80C).
Government contribution = 14% × ₹9,60,000 = ₹1,34,400 a year (80CCD(2)).
In the new regime only the ₹1,34,400 is deductible. At a 20% marginal rate it cuts tax by ₹26,880, plus 4% cess on that, about ₹27,955 in all.
In the old regime he gets the ₹1,34,400 too, the ₹96,000 inside his ₹1,50,000 80C limit, and if he adds ₹50,000 voluntarily, another ₹50,000 under 80CCD(1B), worth ₹10,400 at 20% plus cess.
For private-sector employees
If your employer offers NPS in the salary structure, ask for the employer contribution to be set at up to 14% of basic plus DA. In the new regime this is one of the very few deductions left, and it moves money from taxable salary into your retirement account. It does reduce your take-home pay, since it usually comes out of your CTC. Compare the effect with the salary calculator.
If you choose the old regime, you can also open an NPS account on your own and contribute ₹50,000 a year for the 80CCD(1B) deduction, which is the main reason many people invest in NPS.
How NPS money is taxed when you take it out
- Lump sum at retirement: 60% of the corpus can be taken tax-free.
- Annuity: the part used to buy an annuity is not taxed when you buy it, but the monthly annuity income is taxed at your slab rate every year.
- Partial withdrawals: allowed for specific needs such as children's education, marriage, a house or illness, up to 25% of your own contributions, and these are tax-free.
- Recent change: in December 2025 PFRDA amended its exit rules for non-government subscribers, allowing a larger lump sum (reported as up to 80% at normal exit). The tax law was not changed to match, and as reported, Budget 2026 left the tax-free part at 60%, so the extra part may be taxable. Check the latest position on the PFRDA website before you withdraw.
Is NPS still worth it in the new regime?
For tax alone, only the employer's contribution helps in the new regime. Your own contributions do not reduce tax there, so whether to invest more depends on whether you want a long lock-in retirement product with low costs. For government employees, the choice between NPS and UPS matters more than the tax angle; see UPS vs NPS and the UPS vs NPS calculator.
To estimate your corpus and pension, use the NPS calculator. To see the tax effect with your own salary, use the income tax calculator.