NPS tax benefits: the three deductions, and which regime gets which

The National Pension System is a retirement account, but many people open one for the tax break. There are actually three separate deductions, and which ones you get depends on your tax regime.

A quick note on the law. The Income-tax Act, 2025 took over from 1 April 2026. The NPS deductions, long known as section 80CCD, now sit in section 124 of the new Act. The benefits are the same; only the numbering changed.

Deduction 1: inside the 1.5 lakh rupee limit. On the old regime, your own NPS contributions count towards the same yearly limit as PPF, ELSS and your EPF, long known as section 80C. If that limit is already full, this one adds nothing.

Deduction 2: the extra 50,000 rupees. This is the one NPS is famous for. On the old regime, up to 50,000 rupees of your own contributions gets a separate deduction, on top of the 1.5 lakh. At the 30% slab, that saves up to ₹15,600 a year including the 4% cess; at the 20% slab, up to ₹10,400 (an illustration).

Deduction 3: your employer’s share. If your employer pays into your NPS account as part of your salary package, that money is not taxed as your income, up to a limit. On the new regime, the limit is 14% of your salary (basic pay plus dearness allowance), whoever your employer is. On the old regime, it is 10% for private employers and 14% for government. This is the only NPS deduction the new regime allows.

Did you know? Because the new regime is now the default, the employer contribution is often the most useful NPS benefit for salaried people. Say your basic pay plus dearness allowance is 8 lakh rupees a year (an illustration). Your employer can put up to ₹1.12 lakh a year into your NPS, and none of it is taxed as your salary, even on the new regime. Ask your HR team whether your company offers it.

One more limit to know. If your employer’s contributions to EPF, NPS and superannuation together cross 7.5 lakh rupees in a year, the extra is taxed as part of your salary. This affects only high earners, but check it if your package is large.

The catch: the money is for retirement. NPS Tier 1, the account that gets these deductions, is locked until 60 except in limited cases. Under PFRDA’s exit regulations, as last amended on 20 July 2026, most non-government subscribers must put at least 20% into an annuity at exit and can take up to 80% as a lump sum; pots of 8 lakh rupees or less can be taken in full, and pots between 8 and 12 lakh allow up to 6 lakh as a lump sum. Government employees must put at least 40% into an annuity. How the larger lump sum is taxed depends on the current rules, so check pfrda.org.in and incometax.gov.in before you plan around it. Our NPS explainer covers how the account works.

The takeaway. On the old regime, NPS can add a 50,000 rupee deduction on top of the usual 1.5 lakh. On the new regime, only your employer’s contribution helps, but that can be worth a lot. Lock-in is the price either way.

More to read: NPS explained, old vs new tax regime, and retirement planning.