NPS Tax Benefits: Section 80CCD(1), 80CCD(1B) and 80CCD(2)
NPS gives three tax breaks: 80CCD(1) within ₹1.5 lakh, an extra ₹50,000 under 80CCD(1B), and employer contribution under 80CCD(2), which even works in the new regime.
The 80ccd nps deduction depends on who contributes and which tax regime you choose. For FY 2025-26 / AY 2026-27, personal NPS contributions qualify under Sec. 80CCD(1) Income-tax Act and Sec. 80CCD(1B) Income-tax Act only in the old regime. Employer contributions qualify under Sec. 80CCD(2) Income-tax Act in both regimes, subject to salary-based limits. The additional personal deduction remains ₹50,000, while government and private-sector employer limits differ under the old regime.
How do the three NPS deductions compare?
NPS provides two deductions for your own eligible contributions and a separate deduction for employer contributions.
The Income-tax Act, 1961 continues to govern FY 2025-26 / AY 2026-27.
| Provision | Contribution covered | Old regime | New regime |
|---|---|---|---|
| Sec. 80CCD(1) Income-tax Act | Your contribution | Employee: up to 10% of salary; self-employed: up to 20% of gross total income, within the ₹1.5 lakh combined ceiling | Not available |
| Sec. 80CCD(1B) Income-tax Act | Your additional eligible contribution | Up to ₹50,000 outside the ₹1.5 lakh ceiling | Not available |
| Sec. 80CCD(2) Income-tax Act | Central or State Government employer contribution | Up to 14% of salary | Up to 14% of salary |
| Sec. 80CCD(2) Income-tax Act | Other employer contribution | Up to 10% of salary | Up to 14% of salary |
For these limits, salary includes basic pay and dearness allowance where the employment terms provide for it, but excludes other allowances and perquisites. Do not calculate the percentage on total CTC.
The ₹1.5 lakh ceiling under Sec. 80CCE Income-tax Act combines deductions under Sec. 80C Income-tax Act, Sec. 80CCC Income-tax Act and Sec. 80CCD(1) Income-tax Act.
How can you claim deductions for your own contributions?
Under the old regime, allocate eligible personal contributions between the shared ₹1.5 lakh limit and the separate ₹50,000 NPS deduction without counting any contribution twice.
If EPF, eligible insurance premiums and other investments already exhaust your ₹1.5 lakh ceiling, an eligible ₹50,000 NPS contribution can still qualify under Sec. 80CCD(1B) Income-tax Act.
If that ceiling is unused, eligible personal NPS contributions can potentially support deductions totalling ₹2 lakh. However, the portion claimed under Sec. 80CCD(1) Income-tax Act must also satisfy the applicable 10% or 20% income-based limit.
Self-employed taxpayers use gross total income, not turnover or gross business receipts, for their 20% calculation. They cannot treat their own contribution as an employer contribution.
For AY 2026-27, eligible parent or guardian contributions to an NPS Vatsalya account also fall within Sec. 80CCD(1B) Income-tax Act, subject to its conditions. The ₹50,000 ceiling is shared with the taxpayer’s own qualifying contributions, not available separately for each account.
Retain contribution statements and payment records for amounts actually contributed during the financial year.
What employer contribution qualifies under the new regime?
Employer NPS contributions remain deductible under the new regime, generally up to 14% of the employee’s qualifying salary.
The new regime under Sec. 115BAC Income-tax Act does not permit personal deductions under Sec. 80CCD(1) Income-tax Act or Sec. 80CCD(1B) Income-tax Act. It does permit Sec. 80CCD(2) Income-tax Act.
The contribution must genuinely be made by the employer. An employee’s direct deposit cannot simply be relabelled an employer contribution in the return.
Employer contributions are included in salary income, with the eligible deduction then claimed separately. Amounts exceeding the applicable deduction limit remain taxable.
An employer-supported NPS arrangement can therefore be valuable, but restructuring fixed CTC may reduce take-home pay. Compare the tax saving with liquidity needs and retirement restrictions using our income tax calculator.
What does a worked example look like in rupees?
Neha’s example shows that a larger deduction does not necessarily produce a lower final tax bill.
Assume Neha is a resident individual below 60 employed by a private-sector company. For FY 2025-26:
- Basic pay plus qualifying DA: ₹12,00,000.
- Employer NPS contribution, additional to this salary: ₹1,68,000, being 14%.
- Her own NPS contribution: ₹50,000.
- No other income, exemptions or deductions.
| Calculation | Old regime | New regime |
|---|---|---|
| Salary including employer NPS | ₹13,68,000 | ₹13,68,000 |
| Standard deduction | ₹50,000 | ₹75,000 |
| Employer NPS deduction | ₹1,20,000 | ₹1,68,000 |
| Personal NPS deduction | ₹50,000 | Nil |
| Taxable income | ₹11,48,000 | ₹11,25,000 |
| Income tax before rebate and cess | ₹1,56,900 | ₹52,500 |
| Rebate under Sec. 87A Income-tax Act | Nil | ₹52,500 |
| Final tax including 4% cess | ₹1,63,176 | Nil |
The old-regime private-sector employer limit leaves ₹48,000 of the employer contribution without a deduction. Her own ₹50,000 qualifies under Sec. 80CCD(1B) Income-tax Act.
Under the new regime, her ordinary slab-rate taxable income is below ₹12 lakh, so the applicable resident-individual rebate eliminates tax. Special-rate income can change this result.
How are NPS withdrawals and annuities taxed?
NPS exit permissions and income-tax exemptions are different, so permission to withdraw money does not automatically make it tax-free.
Under Sec. 10(12A) Income-tax Act, a payment on closure or opting out is exempt up to 60% of the total amount payable. Annuity income is taxable in the year received.
The familiar normal-exit arrangement at age 60 allows a 60% lump sum and requires at least 40% for an annuity. However, that is no longer a universal description: revised PFRDA rules introduced in December 2025 permit eligible non-government subscribers to withdraw up to 80%, subject to applicable conditions.
The regulatory change does not itself increase the tax exemption beyond 60%. Check subscriber category, corpus, exit date and withdrawal method before choosing an option.
Eligible partial withdrawals up to 25% of your own contributions, not the entire account value, are exempt under Sec. 10(12B) Income-tax Act when statutory and regulatory conditions are met. Permitted purposes include specified education, marriage, housing and illness expenses.
Do Tier II accounts receive the same benefits?
Ordinary Tier II contributions do not qualify for the NPS deductions available for eligible Tier I contributions.
Tier II is a voluntary savings account with greater withdrawal flexibility. Merely holding it alongside Tier I does not make its deposits deductible.
The limited exception is the notified Tier II tax-saving arrangement for eligible Central Government employees, with a three-year lock-in and an old-regime deduction under Sec. 80C Income-tax Act. It does not create an additional ₹50,000 deduction.
How does the ₹7.5 lakh employer cap work?
Aggregate employer contributions above ₹7.5 lakh to specified retirement funds create a taxable perquisite independently of the NPS percentage limit.
Sec. 17(2)(vii) Income-tax Act covers aggregate employer contributions to a recognised provident fund, NPS and an approved superannuation fund.
Annual accretion attributable to taxable excess contributions is also taxable under Sec. 17(2)(viia) Income-tax Act, calculated under Rule 3B Income-tax Rules.
Consequently, a contribution within the 14% NPS limit can still require additional tax analysis where combined employer-funded retirement benefits exceed ₹7.5 lakh.
What mistakes should taxpayers avoid?
Most NPS errors involve the wrong regime, contribution category or salary base.
Avoid claiming personal NPS deductions under the new regime, counting ordinary Tier II deposits, or claiming the same contribution twice. Also check the ₹7.5 lakh combined employer threshold and remember that annuity income is taxable.
Reconcile your NPS statement, payroll records and Form 16 before filing.
How SP & SC helps
SP & SC Legal and Taxation Services, Bengaluru, helps employees and employers apply NPS deductions correctly.
We review salary structures, contribution records and regime comparisons through our payroll services and income tax filing.
Fees are a fixed quote after reviewing the case, provided in writing before work starts. Contact SP & SC or message WhatsApp at +91 90356 74566.
Frequently asked questions
Is the extra ₹50,000 available under the new regime?
No. The additional personal deduction is available only under the old regime.
Can self-employed people claim NPS deductions?
Yes. Under the old regime, the 20% gross-total-income limit and ₹1.5 lakh combined ceiling apply, with an additional eligible ₹50,000 deduction.
Is the NPS lump sum entirely tax-free?
Not necessarily. The closure or opting-out exemption generally covers up to 60%; a higher permitted withdrawal is not automatically fully exempt.
What is the employer contribution limit?
It is 14% of qualifying salary under the new regime. Under the old regime, it is 14% for Central or State Government employers and 10% for other employers.
Can employer NPS be claimed after exhausting ₹1.5 lakh?
Yes. The employer contribution deduction sits outside both the ₹1.5 lakh combined ceiling and the additional personal ₹50,000 limit.
Written by
SP & SC Editorial
Editorial team at SP & SC Legal and Taxation Services — practising advocates, chartered accountants, and company secretaries publishing hands-on guidance from live client files.
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