Is NPS Tax Benefit Available in New Tax Regime?

Written by : Knowledge Center Team

2026-01-05

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Over 1.5 crore Indians have subscribed to the National Pension Scheme as of October 2024. It is one of the simplest ways to save for your retirement at a low cost while also gaining tax benefits. However, since the introduction of the New Tax Regime and its changing structure, there has been considerable confusion regarding the relevance of tax exemptions in the new regime. This blog covers all the doubts that have been surfacing recently, so read on to be fully aware of the NPS tax benefits.

Key Takeaways

Employer contribution (80CCD(2)) in NPS contributions remains fully deductible
Employer contributions are capped uniformly at 14% of Salary (Basic + DA)
No deductions on personal NPS contributions under the New Regime
60% tax-free corpus withdrawal; 40% for annuity is also tax-exempt as per Uniform Tax-Exemption at Withdrawal (EEE)
The New Tax Regime is best for salaried individuals with employer contributions, but with minimal other deductions

Is NPS Considered in the New Tax Regime?

The simple answer is yes; NPS is absolutely considered in the New Tax Regime, but the application of tax benefits differs significantly from the Old Tax Regime. The New Tax Regime (Section 115BAC), introduced to simplify the tax structure by offering lower slab rates in exchange for withholding most exemptions and deductions, initially caused panic among taxpayers relying on instruments like NPS.

However, a crucial tax benefit linked to NPS is that the deduction on the employer’s contribution was strategically retained in the New Tax Regime, keeping NPS relevant for salaried professionals across the board. Understanding which sub-sections of Section 80CCD are still applicable is key to effective financial planning today.

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A Quick Recap of Section 80CCD

Section 80CCD of the Income Tax Act, 1961, governs the tax deductions available for contributions made towards notified pension schemes, primarily the National Pension System (NPS). This section is divided into three critical components:

Section 80CCD(1): Covers the deduction for the individual's own contributions (employee or self-employed).
Section 80CCD(1B): Covers an additional deduction exclusively for the individual's NPS contributions.
Section 80CCD(2): Covers the deduction for the employer's contribution on behalf of the employee.

While understanding Section 80CCD is essential, combining tax-efficient instruments such as NPS with structured life insurance plans, like those from Canara HSBC Life Insurance, can enhance both retirement readiness and financial security.

NPS Tax Benefits Under the Old Tax Regime: The ‘Full House’

For those who continue to opt for the Old Tax Regime, NPS offers the maximum possible leverage in terms of deductions. This regime provides a complete suite of tax-saving opportunities that can potentially reduce your taxable income by a substantial amount.

80CCD(1): The Primary Deduction Avenue

Under the Old Tax Regime, you can claim a deduction for your contribution to the NPS Tier I account, subject to the following limits:

For Salaried Employees: The maximum deduction is limited to 10% of your Salary (Basic + Dearness Allowance).
For Self-Employed Individuals: The deduction is capped at 20% of your Gross Total Income.

It is crucial to remember that the deduction claimed under Section 80CCD(1) forms a part of the overall ceiling of ₹1,50,000 allowed under Section 80CCE (which includes 80C, 80CCC, and 80CCD(1)).

80CCD(1B): The Exclusive NPS Bonus

This section is usually described as the dedicated incentive for retirement savings and is exclusive to the Old Tax Regime. The benefit here is an additional tax deduction of ₹50,000 for any voluntary contribution made by the individual to their NPS Tier I account.

Key Point

This ₹50,000 deduction is above the ₹1.5 lakh limit specified under Section 80CCE. This means that a taxpayer can claim a total deduction of up to ₹2,00,000 (₹1,50,000 + ₹50,000) solely through their personal contributions to NPS and other qualifying instruments.

80CCD(2): Employer-Sponsored Retirement

Under the Old Tax Regime, the employer’s contribution to your NPS Tier I account is also deductible, over and above the ₹1.5 lakh limit of 80CCE. The limits are:

Central/State Government Employees: Up to 14% of Salary (Basic + DA).
Other Employees (Private Sector): Up to 10% of Salary (Basic + DA).

For taxpayers who have significant NPS contributions from their employer, this deduction ensures that the contribution is not taxed as income, making NPS a highly efficient remuneration component.

NPS New Tax Regime Benefits: Focusing on Employer Contributions

When an individual chooses the New Tax Regime, the landscape of deductions changes dramatically. The policy shifts the focus away from individual deductions towards simplified, lower tax rates. Consequently, two crucial NPS deduction avenues are discontinued, while one remains fully intact.

Deductions Withdrawn in the New Tax Regime

When you choose the New Tax Regime, you let go of the following NPS-related benefits:

NPS Deduction Section	Status in the New Tax Regime	Reason for Withdrawal
Section 80CCD(1)	NOT Available	Part of the deductions is disallowed under the New Tax Regime
Section 80CCD(1B)	NOT Available	This additional ₹50,000 deduction is not permitted as it is tied to individual investment choices.

If you rely on personal NPS contributions (up to ₹2 lakh) for tax savings, the New Regime offers little benefit unless your income is low and other deductions are minimal.

80CCD(2): The Key Tax Advantage that Remains

The one significant exception that keeps NPS highly relevant under the New Tax Regime is the deduction on the employer’s contribution under Section 80CCD(2). This deduction remains fully applicable.

The employer’s contribution is initially considered part of the employee’s salary income. However, the deduction under 80CCD(2) effectively makes this portion tax-exempt, ensuring the NPS new tax regime remains an attractive tax-efficient retirement planning tool, even in the absence of other deductions.

The Enhanced Deduction Limit for All Employees

Recent amendments raise the 80CCD(2) employer deduction for private sector employees to 14% of Salary (Basic + DA), matching government employees. Effective 1st of April 2025, this boosts NPS’s appeal under the New Tax Regime.

Deduction Limits Under 80CCD(2) in the New Regime:

Government Employees: Up to 14% of Salary (Basic + DA).
Other Employees (Private Sector): Up to 14% of Salary (Basic + DA).

This means that an employer can contribute a higher percentage towards the employee's NPS account, and the employee can claim the entire amount as a deduction, regardless of the tax regime chosen. This is a huge plus point for salaried individuals under the New Tax Regime.

Did You Know?

NPS and APY Assets Under Management (AUM) hit ₹16 lakh crore by Oct 2025, doubling from ₹8 lakh crore in under two years.

Source: PIB

Comparative Analysis: Old vs. New Regime NPS Benefits

To summarise the stark difference in how NPS tax benefits are applied, here is a detailed comparative table for a salaried professional:

Tax Benefit Component	Old Tax Regime	New Tax Regime	Implication
80CCD(1) - Employee Contribution	Up to 10% of Salary (part of ₹1.5L CCE limit)	NOT AVAILABLE	Cannot claim a deduction for personal contribution
80CCD(1B) - Additional ₹50,000	AVAILABLE (over and above ₹1.5L limit)	NOT AVAILABLE	The primary tax sweetener for NPS is lost
80CCD(2) - Employer Contribution	10% (Private) or 14% (Govt.) of Salary	AVAILABLE (Uniformly 14% of Salary for all sectors, effective from FY 2025-26)	This benefit is retained and often enhanced, keeping NPS tax-efficient
Maximum Personal Deduction from NPS	₹2,00,000 (80CCD(1) + 80CCD(1B))	₹0 (No personal contribution benefit)	The Old Regime is better for individuals making high personal contributions
Total Deduction Potential (Employee + Employer)	Highly substantial (₹2L personal + 80CCD(2) amount)	Limited to the Employer's Contribution only (80CCD(2) amount)	The New Regime benefit is entirely passive (employer-driven)

NPS Tax Exemptions at Withdrawal: The EEE Structure

Another advantage of the National Pension System is its Exempt-Exempt-Exempt (EEE) status, which is still the same under both the Old and New Tax Regimes:

Exempt Contribution: The contribution amount (under 80CCD sections) is deductible from taxable income.
Exempt Growth: The returns or interest earned on the accumulated corpus over the entire term are exempt from tax.
Exempt Withdrawal: A significant portion of the withdrawal is exempt from tax at the time of maturity or exit.

Conclusion: Making the Right Choice for Your NPS Tax Benefits

NPS remains relevant under the New Tax Regime, but its benefits are more streamlined. For those with high housing loan interest, substantial health insurance premiums, and full utilisation of the ₹1.5 lakh 80C limit plus the ₹50,000 80CCD(1B) benefit, the Old Tax Regime generally remains more tax-efficient.

On the contrary, if you are a younger salaried professional with few deductions, you may save more under the New Tax Regime’s lower tax slabs while still enjoying the retained deduction on employer NPS contributions under Section 80CCD(2). With a uniform 14% deduction limit for all employers, NPS remains a powerful tool for retirement planning regardless of your tax regime. Evaluating both NPS and complementary solutions, like the retirement-focused offerings from Canara HSBC Life Insurance, can help you optimise tax benefits while ensuring a secure retirement.

Glossary

Section 115BAC: Provision introducing the New Tax Regime with lower slab rates, replacing most exemptions and deductions
80CCD(1B): Additional ₹50,000 tax deduction for NPS contributions, over and above the ₹1.5 lakh 80C limit
NPS Tier I: Primary retirement account with tax benefits; withdrawals restricted until retirement
EEE: Exempt-Exempt-Exempt means contributions, growth, and withdrawals of an NPS corpus are all tax-free

FAQs

Only the deduction on your employer's contribution under Section 80CCD(2) is retained. All personal contribution deductions (80CCD(1) & 80CCD(1B)) are lost.

The limit is uniformly 14% of your Salary (Basic + DA) for employees across all sectors (Private, Central/State Govt.).

No. The additional deduction of ₹50,000 for self-contribution is strictly not permitted under the New Tax Regime (Section 115BAC).

No. The NPS maintains its EEE status, with 60% of the lump sum corpus being entirely tax-exempt upon maturity. Only the subsequent annuity income is taxed.

NPS remains valuable because the employer's 14% contribution is tax-neutral, providing a significant, passive retirement savings advantage without sacrificing the New Regime's lower tax rates.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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