Tax Benefits of NPS Under Section 80CCD in 2025: Old vs New Regime Explained
Asharam Swain- Apr 14
- 9 min read
Updated: Apr 23
The National Pension System (NPS) provides tax-saving opportunities under Section 80CCD of the Income Tax Act. NPS offers three distinct deduction avenues: personal contributions, voluntary top-ups, and employer support. While the old tax regime allows full access to these benefits, the new regime restricts eligibility to only employer contributions. With recent updates enhancing its appeal and Budget 2025 hinting at further inclusions, NPS continues to stand out as a dual-benefit scheme, securing retirement while reducing annual tax liability.
Table of Content
What Is Section 80CCD of the Income Tax Act?
Section 80CCD of the Income Tax Act governs tax deductions related to contributions made towards the National Pension System (NPS). It is a sub-section under Chapter VI-A and is divided into three parts:
80CCD(1): Covers deductions for self-contributions by salaried and self-employed individuals.
80CCD(1B): Offers an additional ₹50,000 deduction for voluntary contributions beyond the limit under 80CCD(1).
80CCD(2): Allows deduction for employer contributions, applicable to both private and government sector employees.
These provisions were introduced to encourage long-term retirement savings while offering layered tax incentives for contributors.
Is NPS Deduction Allowed in New Tax Regime?
Under the new tax regime, most personal tax deductions are not available, including those under Sections 80C, 80CCD(1), and 80CCD(1B). As a result, individuals cannot claim tax benefits on their own contributions to NPS if they opt for the new regime.
However, employer contributions under Section 80CCD(2) remain eligible for deduction even under
the new regime. This makes NPS one of the few investment-linked instruments offering partial tax advantages despite the broader restrictions.
With potential amendments proposed in Budget 2025, there is growing anticipation around extending the ₹50,000 deduction under 80CCD(1B) to the new regime, but it has not been implemented yet.
How NPS Tax Benefit Works in the Old Tax Regime
The old tax regime provides full access to all three NPS-related deductions, making it significantly more rewarding for contributors:
Self-Contribution under 80CCD(1): Deductible up to ₹1.5 lakh, within the combined ceiling of Section 80C.
Voluntary Top-up under 80CCD(1B): An exclusive deduction of ₹50,000 beyond the 80C limit.
Employer Contribution under 80CCD(2): Deductible up to 14% of salary (Basic + DA) for government employees and up to 10% for private sector employees, with no upper monetary cap.
When planned effectively, NPS contributions under the old regime can offer total deductions of ₹2 lakh or more annually, with the employer’s share offering additional savings without impacting the 80C ceiling.
Section 80CCD(1): Employee or Self-Employed Contribution
Section 80CCD(1) allows individuals to claim a deduction for contributions made to the National Pension System. This applies to both salaried and self-employed taxpayers under the old tax regime.
For salaried individuals, the eligible deduction equals 10% of salary (basic + dearness allowance).
For self-employed individuals, the deduction is 20% of gross total income. However, the total benefit under Section 80CCD(1) is capped within the broader ₹1.5 lakh limit that includes Sections 80C, 80CCC, and 80CCD(1).
No deductions under this section are permitted under the new tax regime.
Section 80CCD(1B): Additional Deduction of ₹50,000
To incentivise retirement savings further, an exclusive deduction of ₹50,000 is available under Section 80CCD(1B). This is over and above the ₹1.5 lakh cap under Section 80C. Contributions made voluntarily to the NPS Tier-I account qualify for this benefit.
The deduction is available only under the old tax regime. No changes have been announced for the new regime yet, but Budget 2025 proposals suggest that this benefit may soon be extended to new regime taxpayers as well.
This section is often used by high-income taxpayers to push total tax deductions up to ₹2 lakh when combined with 80C-linked investments.
Section 80CCD(2): Employer Contribution
Section 80CCD(2) applies exclusively to contributions made by the employer to the employee’s NPS Tier-I account. The deduction is available under both tax regimes, making it especially valuable for new regime taxpayers with limited deduction avenues.
For private-sector employees, employers can contribute up to 10% of basic salary plus dearness allowance, while for government employees, the ceiling extends to 14%. The deduction claimed under this section is not subject to the ₹1.5 lakh limit under Section 80C, which distinguishes it from personal contributions.
There is no monetary cap on the deduction amount, but it is restricted to the applicable percentage of salary. This makes employer contributions a powerful tax planning tool, particularly for high earners.
Comparison of 80CCD(1), 80CCD(1B), and 80CCD(2)
Provision | Contribution Type | Maximum Deduction | Eligible Assessee | Tax Regime Applicability |
Section 80CCD(1) | Self-contribution (employee/self-employed) | Up to ₹1.5 lakh (part of combined 80C cap) | Salaried and self-employed | Old Regime Only |
Section 80CCD(1B) | Additional self-contribution | ₹50,000 (over and above 80C) | Salaried and self-employed | Old Regime Only |
Section 80CCD(2) | Employer’s contribution | Up to 14% of salary (Basic + DA) | Salaried (private/government) | Old and New Regimes |
Deductions under 80CCD(1) and 80CCD(1B) combined can reach up to ₹2 lakh annually.
Employer contributions under 80CCD(2) are not capped monetarily but are subject to salary percentage limits.
Only Section 80CCD(2) qualifies for deduction under the new regime.
Withdrawal and Tax Implications After Maturity
At Retirement (Age 60):
60% of the accumulated corpus can be withdrawn tax-free as a lump sum.
The remaining 40% must be used to purchase an annuity, which is taxable as income in the year of receipt.
Early Exit Before Age 60:
Only 20% of the corpus is allowed as a tax-free lump sum.
80% must be mandatorily converted into an annuity, taxable upon payout.
Small Corpus Exception:
If the total corpus is ₹5 lakh or less, the entire amount can be withdrawn tax-free, bypassing the annuity rule.
Partial Withdrawals:
Up to 25% of one's own contribution (not including returns or employer's contribution) can be withdrawn for specified purposes like education, medical treatment, or marriage.
These partial withdrawals are tax-free, subject to conditions.
Recent Changes and Budget 2025 Highlights
Employer Contribution Limit Increased:The ceiling under Section 80CCD(2) has been raised from 10% to 14% of Basic + DA for private-sector employees as well, bringing parity with government employees. Effective April 1, 2025.
Inclusion of 80CCD(1B) in New Regime Proposed:Budget discussions indicate the possible extension of the ₹50,000 additional deduction under Section 80CCD(1B) to the new tax regime, a move expected to increase NPS adoption.
NPS Vatsalya Launch:A new NPS variant for women investors and homemakers, offering similar tax benefits under 80CCD(1B), with simplified compliance for withdrawals and equity allocations.
Corpus Withdrawal Clarification:The ₹5 lakh tax-free withdrawal exemption has been reiterated, applicable to both voluntary exits and retirement withdrawals, simplifying the decision-making for small contributors.
Discussion on Annuity Tax Relief: Stakeholders have proposed tax concessions on annuity income, especially for low-income retirees. While not yet implemented, it remains under review.
Tips to Maximize Your NPS Tax Benefits
Split Contributions Smartly: Utilize both Section 80CCD(1) and 80CCD(1B) by limiting 80C investments to ₹1.5 lakh and channeling any additional funds into NPS for the extra ₹50,000 deduction.
Leverage Employer Contribution: If employed, opt for employer contributions under 80CCD(2), which are tax-deductible without a monetary cap—up to 14% of basic salary in some cases.
Combine with Other Deductions: Use NPS alongside PPF or ELSS to increase total deductions while maintaining portfolio diversification.
Start Early, Benefit Longer: Contributions made earlier in the financial year allow more time for compounding and reduce last-minute tax rush.
Use Auto Choice if Unsure: For those unsure about asset allocation, Auto Choice offers a lifecycle-based approach with balanced equity exposure.
Who Should Opt for NPS for Tax Planning?
Salaried Individuals in the Old Regime: With eligibility under Sections 80CCD(1), 80CCD(1B), and 80CCD(2), salaried employees can maximize deductions up to ₹2 lakh or more.
Self-Employed Professionals: NPS allows a deduction of up to 20% of gross income under 80CCD(1), making it a high-benefit option for freelancers and consultants.
Young Investors Seeking Retirement Security: NPS offers long-term compounding and low fund management charges, ideal for those with a retirement horizon beyond 15 years.
Government Employees: Eligible for employer contributions of up to 14% of salary, this group enjoys the highest tax benefit under 80CCD(2).
Taxpayers Missing the ₹1.5 Lakh Mark: Those not fully exhausting their 80C limit can plug the gap with NPS and still claim the additional ₹50,000.
Common Mistakes to Avoid When Claiming NPS Deductions
Assuming All Sections Apply in New Regime: Only 80CCD(2) is valid under the new tax regime. Deductions under 80CCD(1) and 80CCD(1B) are exclusive to the old regime.
Overlapping 80C and 80CCD(1): The ₹1.5 lakh cap is shared, contributions under 80CCD(1) reduce your available 80C headroom.
Ignoring Employer Contribution Cap: While there's no monetary limit, the percentage cap (10% or 14%) on salary is strictly monitored during assessments.
Missing the Deadline: Contributions must be made within the financial year to be eligible for deduction.
Not Documenting Correctly: Ensure NPS contribution proofs are uploaded accurately while filing returns, errors may delay processing or trigger notices.
Conclusion
NPS delivers more than just retirement security, it offers one of the most tax-efficient savings instruments under the Income Tax Act. When utilized strategically across all applicable sections, the deductions can significantly lower taxable income, especially under the old regime. With evolving policies and budget inclusions, NPS continues to remain a valuable option in long-term financial planning.
FAQs
What is the maximum tax benefit available under Section 80CCD?
A total deduction of up to ₹2 lakh is available under Section 80CCD. This includes up to ₹1.5 lakh under Section 80CCD(1) as part of the overall 80C limit, plus an additional ₹50,000 under Section 80CCD(1B). Employer contributions under Section 80CCD(2) are claimable over and above these limits without any monetary ceiling.
Can a self-employed individual claim deductions under 80CCD(2)?
No. Section 80CCD(2) applies only to employer contributions made to an employee’s NPS account. Self-employed individuals can claim deductions under Sections 80CCD(1) and 80CCD(1B) only
.
Is the ₹50,000 deduction under 80CCD(1B) available in the new tax regime?
Currently, the ₹50,000
deduction under Section 80CCD(1B) is not available in the new tax regime. Only employer contributions under 80CCD(2) qualify for deduction under the new regime. However, future budgets may revisit this to increase adoption.
How is employer contribution under NPS taxed?
Employer contributions up to 10% (or 14% for government employees) of salary are tax-deductible under Section 80CCD(2). These contributions are not treated as taxable income in the year of receipt, but the eventual pension or annuity received from NPS is taxed as per applicable slab rates.
Are there any limits on how much an employer can contribute?
There is no upper monetary limit on employer contributions under Section 80CCD(2). However, the deduction is limited to 10% of salary (14% for central/state government employees). Any contribution beyond this limit is not deductible.
Can NPS contributions be claimed along with other 80C investments?
Yes. Contributions under 80CCD(1) are part of the ₹1.5 lakh ceiling under Section 80C. The ₹50,000 deduction under 80CCD(1B) is available in addition to this limit, making it a valuable option for those who have already exhausted their 80C cap with PPF, ELSS, or life insurance.
How do withdrawals from NPS affect tax calculations?
At maturity, up to 60% of the NPS corpus can be withdrawn tax-free. The remaining 40% must be used to purchase an annuity, which is taxable as income in the hands of the investor in the year of receipt.
What happens if the NPS corpus is less than ₹5 lakh at retirement?
If the total accumulated corpus is ₹5 lakh or less at retirement, the entire amount can be withdrawn as a lump sum without any tax liability. Annuity purchase is not mandatory in such cases.
Is annuity income from NPS taxable every year?
Yes. The income received from the annuity purchased through 40% of the NPS corpus is taxable each year under the head ‘Income from Other Sources’, based on the individual’s tax slab.
Can both 80CCD(1) and 80CCD(1B) be claimed in the same financial year?
Yes. Both deductions can be claimed together in the same year. The combined self-contribution of up to ₹2 lakh can be split into ₹1.5 lakh under 80CCD(1) and ₹50,000 under 80CCD(1B), subject to eligibility.
Is NPS better than PPF or ELSS for tax-saving?
NPS offers a higher cumulative deduction potential and employer contribution benefits, but it has longer lock-in and partial taxability on withdrawal. PPF and ELSS may offer more flexibility or liquidity, depending on the investor's profile and goals.
How do I calculate the optimal NPS contribution to claim the full benefit?
Start by ensuring ₹1.5 lakh in total 80C-linked investments, including NPS. Then contribute an additional ₹50,000 exclusively to NPS to claim under 80CCD(1B). If salaried, coordinate with your employer to ensure their NPS contribution qualifies under 80CCD(2) for additional tax savings.
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