Want to save for retirement? Learn how to claim tax deductions on your National Pension System contributions

The National Pension System (NPS) offers three layers of tax deduction. Section 80CCD(1) covers own contributions within the ₹1.5 lakh Section 80C cap. Section 80CCD(1B) gives an additional ₹50,000 deduction exclusive to NPS, over and above 80C. Section 80CCD(2) allows deduction for employer contribution to NPS up to 10 per cent of salary (14 per cent for government employees), and this benefit is available under both the old and new tax regimes, making NPS uniquely attractive for new-regime taxpayers.

Priyanka Wadhera

Published: 3 Feb 2023

Updated: 16 May 2026

3 min read

The National Pension System (NPS) is India's flagship market-linked retirement savings programme, regulated by the Pension Fund Regulatory and Development Authority (PFRDA). For FY 2026-27, NPS continues to offer a uniquely layered tax deduction structure under Sections 80CCD(1), 80CCD(1B), and 80CCD(2), with the employer contribution leg now equally compelling under the new tax regime. Understanding how each leg interacts with the regime choice is the key to maximising your retirement corpus.

NPS account structure

Tier I account: mandatory retirement account with a lock-in until 60 years of age.
Tier II account: voluntary savings account with full liquidity; no tax benefit on contributions for most subscribers.
Subscribers: individuals aged 18-70 years, salaried or self-employed.
Asset allocation: choice of auto or active choice across equity (E), corporate debt (C), government securities (G), and alternatives (A).
Annual maintenance is minimal; charges are among the lowest globally.
On exit at 60, 60 per cent of corpus is paid as lump sum and 40 per cent must be used to purchase annuity.

Section 80CCD(1) — within the 80C cap

Contributions by an individual to their own NPS Tier I account qualify for deduction under Section 80CCD(1). For salaried employees, the limit is 10 per cent of salary (basic plus DA). For self-employed individuals, the limit is 20 per cent of gross total income. This deduction falls within the overall Section 80C ceiling of ₹1.5 lakh, aggregated with PPF, ELSS, life insurance premium, and other 80C instruments. Available only under the old tax regime.

Section 80CCD(1B) — the additional ₹50,000

This is the most attractive feature of NPS for individual taxpayers. Section 80CCD(1B) allows an additional deduction up to ₹50,000 for own contributions to NPS Tier I, over and above the Section 80C cap of ₹1.5 lakh. Total individual NPS-related deduction can therefore reach ₹2 lakh under the old tax regime. Section 80CCD(1B) is exclusive to NPS and is not available for PPF, ELSS, or other 80C products. Available only under the old tax regime.

Section 80CCD(2) — employer contribution to NPS

The employer's contribution to an employee's NPS Tier I account is deductible under Section 80CCD(2) up to 10 per cent of salary for non-government employees and 14 per cent of salary for government employees. Critically, this deduction is available under both the old and new tax regimes, making NPS the single tax-deductible retirement vehicle for new-regime taxpayers. Salaried employees should request their employer to structure CTC to include NPS contribution, lowering taxable income.

Tax treatment at withdrawal

On exit at age 60, 60 per cent of the corpus withdrawn as lump sum is fully tax-exempt under Section 10(12A). The 40 per cent compulsorily applied to purchase an annuity does not attract tax at the point of purchase, but the subsequent annuity payments are taxable in the hands of the subscriber at slab rate as Income from Other Sources. Partial withdrawals up to 25 per cent for specified reasons (children's education, marriage, medical, etc.) are exempt under Section 10(12B).

Reporting in the ITR

Claim self-contribution under Section 80CCD(1) within the ₹1.5 lakh 80C cap (old regime only).
Claim additional ₹50,000 under Section 80CCD(1B) for own NPS contribution (old regime only).
Claim employer contribution under Section 80CCD(2) up to 10 per cent of salary, available under both regimes.
Reflect lump-sum exit withdrawal under Schedule EI.
Report annuity income under Income from Other Sources in subsequent years.
File Form 26AS/AIS reconciliation for any TDS on annuity payments.

Conclusion

NPS is the only retirement product in India that delivers tax benefits across both regimes — via Section 80CCD(2) employer contribution under the new regime, and the full stack under the old regime. For salaried professionals, restructuring CTC to include an NPS leg is one of the cleanest tax-and-retirement wins available. Open a Tier I account, set asset allocation thoughtfully, and let the long compounding window do its work.

Frequently Asked Questions

What is the additional ₹50,000 NPS deduction under Section 80CCD(1B)?

Section 80CCD(1B) allows an additional deduction up to ₹50,000 for own contributions to NPS Tier I account, over and above the ₹1.5 lakh Section 80C ceiling. This benefit is exclusive to NPS and is available only under the old tax regime. Total NPS-related deduction can reach ₹2 lakh per year.

Can I claim NPS deduction under the new tax regime?

Yes, but only for the employer contribution under Section 80CCD(2), available up to 10 per cent of salary for non-government employees and 14 per cent for government employees. Self-contribution deductions under Sections 80CCD(1) and 80CCD(1B) are available only under the old tax regime.

Is the lump-sum withdrawal from NPS at age 60 taxable?

No. The 60 per cent lump-sum withdrawal from NPS at the time of exit on attaining age 60 is fully tax-exempt under Section 10(12A). The mandatory 40 per cent annuity purchase is also tax-free at the point of purchase, but the subsequent annuity income is taxable as Income from Other Sources at slab rate.

Is the employer's NPS contribution part of CTC taxable?

No. The employer's contribution to your NPS Tier I account is deductible under Section 80CCD(2) up to 10 per cent of salary (14 per cent for government employees). It reduces your taxable salary and is available under both the old and new tax regimes, making it a uniquely tax-efficient component of CTC.