NPS Tax Benefits in the New Tax Regime

NPS Deduction in New Tax Regime

Under the revised rules, employee contributions to the NPS are not eligible for tax exemption in the new tax regime. Employer contributions of up to 14% of basic salary are fully exempt from tax under Section 124 (previously Section 80CCD(2)). This allows you to get higher tax-free income while building a retirement corpus. Under the Old Tax Regime, the employer contribution deduction is capped at 10% of basic salary for private sector employees.

The employer contribution deduction under Section 124 (previously Section 80CCD(2)) adds to the tax-efficient design of NPS as a retirement planning product. Note that this benefit is available only to salaried individuals; self-employed individuals are not eligible.

Details of NPS Exemption in New Tax Regime

As discussed above, employer contributions remain one of the key areas of NPS tax benefit in the new tax regime. Below are the key details of how the New Tax Regime treats NPS contributions.

Employer's Contribution to NPS Under Section 80CCD(2)

You can claim a deduction for your employer's contribution to your NPS account. This is the most significant tax benefit for salaried individuals under the new tax regime. From Tax Year 2026-27, this falls under Section 124 of the Income Tax Act 2025 (previously Section 80CCD(2)).

• For Central and State Government employees, the deduction is up to 14% of salary (Basic + Dearness Allowance).
• For other employees (private sector), this limit was enhanced to 14% of salary (Basic + Dearness Allowance), effective from April 1, 2025.
• This deduction is over and above any other limits and is available even if you opt for the new tax regime.

Tax-Exempt Withdrawals

• Partial Withdrawal: Up to 25% of your self-contribution from the NPS Tier I account is tax-exempt under specific conditions (e.g., for higher education, marriage, medical emergencies).
• Lump Sum Withdrawal at Maturity: 60% of the accumulated corpus withdrawn as a lump sum at the age of 60 or superannuation is tax-exempt.
• Annuity Purchase: If you use the remaining 40% of your corpus (after the 60% lump sum withdrawal) to purchase an annuity plan, that amount is also tax-exempt at the time of purchase. However, the pension income received from the annuity will subsequently be taxable as income under the applicable provisions of the Income Tax Act 2025.

What is NOT Available Under the New Tax Regime for NPS

Employee's own contributions to NPS are not eligible for deduction under the new tax regime. Under the old regime, these contributions qualify under Section 80CCD(1) (now Section 124(1)) within the overall ₹1.5 lakh limit, and Section 80CCD(1B) (now Section 124(3)) for an additional ₹50,000 deduction.

NPS Taxation in New Tax Regime and Old Tax Regime

Here's an overview of how NPS rebate in new tax regime and the old one works.

National Pension Scheme Benefits in New Tax Regime

Here are the key benefits of NPS under the new tax regime:

• Tax-Free Employer's Contributions: Employers can contribute up to 14% of the employee's basic salary, and the full 14% NPS amount is tax-exempt.
• Investment Flexibility: NPS allows switching across asset classes like equity, corporate bonds, and government securities without tax implications.
• Cost-effective plan: Fund management fees are as low as 0.09% annually, making it one of the most cost-effective pension plans in the market.

Should You Choose NPS in the New Tax Regime?

If you are a salaried employee under the new tax regime, NPS can help you reduce your tax liability while building a retirement corpus. Although personal contributions do not offer deductions, employer contributions still provide substantial tax relief. This makes NPS one of the few instruments still offering meaningful tax exemptions in the new tax regime.

Conclusion

Investing in NPS is still worth it despite comparatively fewer tax benefits in the new regime than the old. Especially the employer's contribution stands out as a notable exemption under the new tax regime. If you are looking for investment options to reduce taxable income and plan for retirement, NPS remains a highly recommended option. The combination of government-backed security and flexible investment options makes NPS a popular retirement savings product.