NPS deduction in the new tax regime
In the new regime only your employer's NPS contribution is deductible, up to 14% of salary.
In the new tax regime, the only NPS deduction you can claim is on your employer's contribution: up to 14% of salary (basic plus dearness allowance), for every kind of employer. Your own contributions, including the extra ₹50,000, give no deduction in the new regime.
In the old regime all three deductions are available. From tax year 2026-27 they sit in sections 123 and 124 of the Income-tax Act, 2025, which replaced the 80CCD sections of the 1961 Act on 1 April 2026. The limits did not change in the move.
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NPS deductions: old regime vs new regime
Tax year 2026-27, Income-tax Act 2025. Salary means basic pay plus dearness allowance where the terms of employment include it.
Own contribution, inside the ₹1.5 lakh basket with PPF, ELSS, life cover and others
Old name (1961 Act)
80CCD(1)
New section (2025 Act)
s.123, Schedule XV para 1(y)
Limit
10% of salary (employee) or 20% of gross total income (others), within ₹1,50,000
Old regime
Yes
New regime
No
Own contribution, extra
Old name (1961 Act)
80CCD(1B)
New section (2025 Act)
s.124(3)
Limit
₹50,000
Old regime
Yes
New regime
No
Employer's contribution
Old name (1961 Act)
80CCD(2)
New section (2025 Act)
s.124(1), (2)
Limit
14% of salary for Central or State Government employers; 10% for other employers in the old regime, 14% in the new
Old regime
Yes
New regime
Yes
| Deduction | Old name (1961 Act) | New section (2025 Act) | Limit | Old regime | New regime |
|---|---|---|---|---|---|
| Own contribution, inside the ₹1.5 lakh basket with PPF, ELSS, life cover and others | 80CCD(1) | s.123, Schedule XV para 1(y) | 10% of salary (employee) or 20% of gross total income (others), within ₹1,50,000 | Yes | No |
| Own contribution, extra | 80CCD(1B) | s.124(3) | ₹50,000 | Yes | No |
| Employer's contribution | 80CCD(2) | s.124(1), (2) | 14% of salary for Central or State Government employers; 10% for other employers in the old regime, 14% in the new | Yes | Yes |
Worked example: one salary, two regimes
Illustrative numbers. Kavya works for a private company. Basic plus DA is ₹12,00,000 a year. Her employer puts 14% (₹1,68,000) into her NPS account and she adds ₹50,000 of her own.
- 1
1. New regime
Employer's ₹1,68,000 is deductible, because the new regime allows up to 14% for all employers. Her own ₹50,000 gives nothing. Total NPS deduction: ₹1,68,000.
- 2
2. Old regime, employer part
For a private employer the old-regime cap is 10% of salary, so only ₹1,20,000 of the ₹1,68,000 is deductible.
- 3
3. Old regime, own part
Her ₹50,000 can go under s.124(3), the extra slot, leaving her ₹1.5 lakh basket free for PPF or other items. Total NPS deduction: ₹1,70,000.
- 4
4. The lesson
Whether NPS tips the choice of regime depends on the rest of her deductions and the slab rates, not on NPS alone. The employer's contribution is the one deduction that travels to the new regime.
Rules that catch people out
- check_circleThe same rupee cannot be claimed twice. Money claimed under the ₹50,000 slot cannot also be claimed in the ₹1.5 lakh basket, and the reverse.
- check_circleThe ₹50,000 slot also covers contributions a parent or guardian makes to a minor's NPS account, but the combined deduction stays at ₹50,000.
- check_circleSelf-employed people have no employer contribution, so in the new regime they get no NPS deduction.
- check_circleThe new regime is the default. A salaried person has to opt out to claim the own-contribution deductions.
Free account, this exam preselected.
Tax when the money comes out
- Lump sum on closure or exit
- The Act exempts a payment from the NPS Trust on closure or opting out up to 60% of the total amount payable. PFRDA's December 2025 amendments let non-government subscribers take up to 80% as a lump sum at normal exit, so the part above 60% is taxable in the year it is received.
- Annuity
- Corpus used to buy an annuity in the same year is not treated as received. The pension paid by the annuity is taxed as income each year.
- Death of the subscriber
- The amount a nominee receives on the subscriber's death is not treated as the nominee's income.
How XVII tests this
NPS has a full chapter in the XVII workbook, tax included, and the paper is 100 marks with a pass at 60 out of 100 (60%) and negative marking. Expect a salaried client scenario: which of three contributions is deductible under the chosen regime, and how much.
The traps: allowing the ₹50,000 in the new regime, using 10% instead of 14% for a private employer under the new regime, and adding the ₹50,000 to the ₹1.5 lakh as if both always apply. Older study material still quotes the 1961 Act section numbers and the 60:40 exit split. The June 2025 workbook predates both changes, so check which workbook version NISM lists for your test date before deciding which rule the paper expects.
FAQs
Can I claim NPS deduction in the new tax regime?expand_more
Only on your employer's contribution, up to 14% of salary (basic plus DA). Your own contributions get no deduction in the new regime.
Is 80CCD(1B) allowed in the new tax regime?expand_more
No. The extra ₹50,000 deduction (now s.124(3) of the Income-tax Act, 2025) is available only in the old regime.
What is the 80CCD(2) limit in the new regime?expand_more
14% of salary for all employers, government or private. In the old regime it is 14% for Central and State Government employers and 10% for others.
What happened to section 80CCD from April 2026?expand_more
The Income-tax Act, 2025 took effect on 1 April 2026. The NPS deductions moved to sections 123 and 124 with the same limits.
Is the NPS lump sum tax free?expand_more
Up to 60% of the total amount payable on closure or exit is exempt. Any lump sum above that, now possible for non-government subscribers, is taxable.
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