NPS tax benefits in FY 2026-27: Deductions available under old and new tax regimes

For FY 2026-27 (AY 2027-28), taxpayers can claim deductions under various provisions of Section 80CCD, but the scope of these benefits varies between the two regimes. 

Here’s a detailed look at the NPS tax deductions available.

NPS tax benefits under the old tax regime

Under the old tax regime, one can claim deductions up to Rs 2 lakh. Here’s how.

Section 80CCD(1): Deduction for self-contribution

Under Section 80CCD(1), an individual can claim a deduction for contributions made to their NPS account.

• For salaried employees: Up to 10% of salary (basic salary + dearness allowance)
• For self-employed individuals: Up to 20% of gross total income
• Maximum deduction allowed: Rs 1.5 lakh under Section 80CCE.

Section 80CCD(1B): Additional deduction of Rs 50,000

NPS offers an exclusive additional deduction under Section 80CCD(1B).

• Maximum deduction: Rs 50,000
• Available over and above the Rs 1.5 lakh limit. This means that an individual can claim a total deduction of up to Rs 2 lakh through self-contributions to NPS under the old regime.

Section 80CCD(2): Employer’s contribution

Employer contributions to NPS are eligible for deduction under Section 80CCD(2).

• Up to 14% of salary (basic + DA) for Central and State Government employees
• Up to 10% of salary (basic + DA) for other employees

This deduction is available over and above the limits under Sections 80C and 80CCD(1B).

NPS tax benefits under the new tax regime

While most deductions for self-contributions are not available under the new tax regime, employees opting for the new tax regime can still claim a deduction for employer contributions to NPS under Section 80CCD(2). This contribution is fully tax-exempt and can be claimed as a deduction, significantly lowering your taxable income.

In fact, under the new regime, the employer’s contribution limit is allowed up to 14% of the employee’s salary (Basic + DA) for both private and public sector employees. 

Illustration assumes a fixed CTC of Rs 33 lakh. Under the default tax regime, employer NPS contribution is considered at 14% of Basic Salary plus DA, while under the old tax regime, it is considered at 10%.
Particulars	Old Tax Regime		New Tax Regime
	W/o NPS	With NPS	W/o NPS	With NPS
Annual salary (Basic + DA)	33,00,000	30,00,000	33,00,000	28,94,737
Employer NPS Contribution (10%/ 14%)	–	3,00,000	–	4,05,263
Gross Salary	33,00,000	33,00,000	33,00,000	33,00,000
less: Deduction u/s 124(1) [Employer NPS]	–	3,00,000	–	4,05,263
less: Standard Deduction	50,000	50,000	75,000	75,000
Taxable Salary	32,50,000	29,50,000	32,25,000	28,19,737
less: Deduction u/s 124(3) [Employee NPS]	–	50,000	–	–
Taxable Income	32,50,000	29,00,000	32,25,000	28,19,737
Income tax	7,87,500	6,82,500	5,47,500	4,25,921
Health and education Cess	31,500	27,300	21,900	17,037
Total tax liability	8,19,000	7,09,800	5,69,400	4,42,958
If the employee’s income exceeds the surcharge thresholds (Rs 50 lakh, Rs 1 crore, etc.), the actual tax savings will be higher than the figures shown above.

How can salaried employees maximize tax savings through employer NPS contributions under the new regime?

Under the default tax regime, i.e., the new regime, employer contributions to the National Pension System (NPS) remain one of the few tax-efficient components available to salaried employees. Section 124(1) of the Income-tax Act, 2025 (erstwhile Section 80CCD(2)) allows a deduction for employer contributions to Tier-I NPS accounts up to 14% of salary (Basic Salary plus Dearness Allowance) for employees opting for the default regime.

This deduction is available even when the employee opts for the new tax regime, making it one of the few retirement-related tax benefits still available there. “The deduction is allowed up to 14% of salary, based on basic salary plus dearness allowance, where applicable. In simple terms, if the employer offers an NPS contribution, the employee can reduce taxable income,” said CA Chandni Anandan, Tax Expert at ClearTax. 

“As this deduction is available over and above other commonly available tax benefits, employees may consider structuring a portion of their compensation through employer NPS contributions to achieve tax efficiency while building a retirement corpus. Given the limited deductions available under the default regime, employer NPS continues to be a valuable tax planning tool for salaried taxpayers,” commented Akhil Chandna, Partner, Global People Solutions Leader, Grant Thornton Bharat. 

How can salaried individuals use NPS to claim deductions exceeding the standard Section 80C limit?

For taxpayers opting for the old tax regime, NPS remains one of the instruments that allows deductions beyond the standard Rs 1.5 lakh limit available under Section 123 (erstwhile Section 80C). Contributions made by the employee to the Tier-I NPS account qualify for an additional deduction of up to Rs 50,000 under Section 124(3) (erstwhile Section 80CCD(1B)), over and above the Rs 1.5 lakh limit.

In addition, employer contributions to the employee’s Tier-I NPS account are separately deductible under Section 124(1) (erstwhile Section 80CCD(2)) up to 10% of salary (Basic Salary plus Dearness Allowance) and do not form part of the Rs 2 lakh deduction limit available for employee contributions.

Akhil Chandna says, accordingly, a salaried taxpayer can claim up to Rs 2 lakh through self-contributions (Rs 1.5 lakh under Section 123 and Rs 50,000 under Section 124(3)), while also availing a separate deduction for employer NPS contributions up to 10% of salary, making NPS one of the most tax-efficient retirement planning instruments available.

“So, if an employee has already exhausted the 80C limit through PF, life insurance, ELSS, principal repayment, and similar investments, NPS can still give extra tax relief. This makes NPS one of the most useful tools under the old regime for salaried taxpayers seeking to further reduce their taxable income,” commented CA Chandni Anandan. 

What are the biggest mistakes taxpayers make while claiming NPS deductions in their ITR?

Common errors in claiming NPS deductions include incorrect reporting of contributions under the relevant sections, claiming deductions under the wrong tax regime, and overlooking statutory limits. Taxpayers often claim the entire NPS contribution under Section 123 (erstwhile Section 80C) instead of separately reporting the additional Rs 50,000 deduction available for self-contributions to a Tier-I NPS account under Section 124(3) (erstwhile Section 80CCD(1B)).

Another frequent mistake is claiming the additional Rs 50,000 deduction despite opting for the new tax regime, where this benefit is not available. Similarly, employer contributions are sometimes incorrectly reported as employee contributions, whereas they must be claimed separately under Section 124(1) (erstwhile Section 80CCD(2)), subject to the prescribed salary-based limits.

Taxpayers should therefore ensure correct classification of employee and employer contributions, verify eligibility under the chosen tax regime, and reconcile claims with Form 16 and payroll records before filing their return.

“Another mistake is assuming that NPS deductions are available in unlimited amounts; in reality, each section has its own cap and conditions. Taxpayers also sometimes forget to match the amount in the return with the employer’s payroll records or contribution statements, which can lead to mismatches. A final mistake is filing under the wrong tax regime without realising that some NPS deductions are not available in the same way under every regime,” said CA Chandni Anandan. 

How does the additional Rs 50,000 deduction under Section 80CCD(1B) help taxpayers reduce their tax liability?

The additional deduction of up to Rs 50,000 under Section 124(3) (erstwhile Section 80CCD(1B)) incentivises retirement savings by allowing taxpayers to claim a deduction for contributions made to their Tier-I NPS account, over and above the Rs 1.5 lakh limit available under Section 123 (erstwhile Section 80C).

For individuals in the highest tax bracket, this additional deduction can translate into tax savings of approximately Rs 15,600, excluding applicable surcharge, if any. The benefit is particularly valuable for taxpayers who have already exhausted their Section 123 limit and are looking to further optimize their tax outgo while building a long-term retirement corpus.

However, this deduction is available only under the old tax regime and is distinct from the separate deduction available for employer contributions to NPS under Section 124(1) (erstwhile Section 80CCD(2)).

“Since the 80C limit is capped at Rs 1.5 lakh, many old-regime taxpayers who have already used the full limit still have no room left for additional deductions. Section 80CCD(1B) solves that problem by allowing a separate deduction for NPS contributions, which directly reduces taxable income. For taxpayers in higher tax slabs, this can translate into meaningful tax savings, as even a Rs 50,000 deduction can significantly reduce tax outgoings,” commented CA Chandni Anandan.

In which ITR forms can taxpayers report NPS deductions for FY 2026-27?

Based on the structure of recent ITR forms, NPS deductions can be claimed in all commonly used return forms, including ITR-1, ITR-2, ITR-3 and ITR-4, subject to the taxpayer’s eligibility.

Akhil Chandna says, employee contributions to a Tier-I NPS account should generally be reported under the deductions schedule, with a separate disclosure for deductions claimed under Section 123 (erstwhile Section 80C) and Section 124(3) (erstwhile Section 80CCD(1B)), whereas employer contributions should be reported separately under Section 124(1) (erstwhile Section 80CCD(2)), which provides a distinct deduction for employer contributions up to 10% of salary (Basic Salary plus Dearness Allowance).

The deduction should be entered in the deductions schedule, under the relevant section for NPS claims, such as 80CCD(1B) for self-contribution and 80CCD(2) for employer contribution. In practical filing terms, the return will ask for deductions under Chapter VI-A or the salary deduction schedule, and the NPS amount should be placed under the correct head there. The important point is that the entry must match the nature of the contribution- employee contribution and employer contribution cannot be mixed up.

Taxpayers should carefully distinguish between employee and employer contributions while reporting NPS deductions to ensure accurate claims and avoid processing mismatches.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.    

Every financial journey has a turning point. What’s yours?

Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.