Moment guide · FY 2026-27
My employer contributes to NPS
What tax benefit do I get from employer NPS contribution?
Your employer's NPS contribution is deductible under section 80CCD(2): up to 14% of basic + DA for central government employees and 10% for others. It is available in both the old and new tax regimes — the only employer contribution that survives the new regime. Your own NPS contribution under 80CCD(1) and 80CCD(1B) is allowed only in the old regime.
The explained version
What the statute actually does, in plain order.
Who can claim 80CCD(2)
Under section 80CCD(2), your employer's contribution to your National Pension System (NPS) account is deductible from your salary. Central government employees can claim up to 14% of basic + DA; all other employees can claim up to 10%. This deduction is available in both the old and new tax regimes — it is the only employer contribution that survives the new regime.
Employee's own contribution
Your own NPS contribution qualifies separately for deduction: up to 10% of basic + DA under section 80CCD(1) within the overall ₹1.5 lakh section 80C ceiling, plus an additional ₹50,000 under section 80CCD(1B). These employee-side deductions are NOT available in the new regime. Only the employer's 80CCD(2) portion continues in the new regime.
Taxation on withdrawal and exit
On NPS exit, up to 60% of the corpus can be withdrawn as a tax-exempt lump sum. The remaining 40% must be used to buy a mandatory annuity, and the annuity income is taxable as salary in the year it is received. Partial withdrawals up to 25% of your own contributions are exempt under specified conditions.
Common answers people give
Only one of these is right — the rest are where the anxiety comes from.
- ✗Only in the old regime, similar to 80C
- ✓In both old and new regimes, up to 10%/14% of basic+DA
- ✗It replaces my 80C deduction entirely
- ✗It is fully taxable — employer contributions are perks
The #1 trap
Assuming your own 80CCD(1B) ₹50,000 deduction is allowed in the new regime. It is not. Only the employer's contribution under 80CCD(2) remains available in the new regime — a common error that makes the new regime look more beneficial than it actually is.
The decision path
Follow it top to bottom — the first condition that matches is your answer.
Step 1
Which tax regime did you choose?
- New regime: Only the employer's NPS contribution under 80CCD(2) is deductible. Your own contributions under 80CCD(1) and 80CCD(1B) are not allowed.
- Old regime: Both the employer's 80CCD(2) and your own contributions under 80CCD(1) plus 80CCD(1B) (up to ₹50,000 extra) are deductible.
Step 2
Is your employer's NPS contribution above 10% (or 14% for central government) of basic + DA?
- Yes: The excess is treated as a taxable perquisite under section 17(2)(viia); only the allowed limit is deductible under 80CCD(2).
- No: The full contribution is deductible under 80CCD(2) and excluded from your taxable salary.
Worked example
Rahul is a private-sector manager in Mumbai with basic + DA of ₹18 lakh per year (₹1.5 lakh per month). His employer contributes 10% of basic + DA, i.e., ₹1.8 lakh, to his NPS account.
Rahul chose the new tax regime. Because 80CCD(2) is allowed in both regimes, his employer's ₹1.8 lakh contribution was excluded from salary, reducing his tax by roughly ₹18,000 at the 10% bracket. Rahul initially planned to add ₹50,000 of his own money to NPS to claim the 80CCD(1B) extra deduction, but he discovered it is NOT available in the new regime. He compared both regimes using the old-vs-new calculator and found the old regime, which allowed both 80CCD(1) up to ₹1.5 lakh and 80CCD(1B) ₹50,000, gave him a better total after considering his other deductions. The employer NPS contribution alone was not enough to justify the new regime for him.
Questions people actually ask
Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).