Employer NPS Contributions: The 80CCD(2) Deduction Worth Up to 14 Percent of Salary in the New Regime

For a salaried employee weighing the new tax regime against the old for the financial year 2025-26, most of the familiar deductions have vanished: Section 80C's Rs 1.5 lakh, the Section 80CCD(1B) top-up of Rs 50,000, house-rent allowance relief and Chapter VI-A generally do not survive the switch. One deduction is the exception, and it is the most generous of the lot. Section 80CCD(2), which covers what your employer puts into your National Pension System account, not only survives in the new regime but is worth more there: up to 14 per cent of salary against 10 per cent under the old regime, per the Pension Fund Regulatory and Development Authority (PFRDA).

This article sets out how the employer NPS route works under Section 80CCD(2) of the Income-tax Act, 1961, how the corpus is taxed when you retire, and a 25-year worked example that quantifies the gap between the 10 per cent and 14 per cent caps. Every figure below is drawn from the PFRDA NPS-for-corporates rules or the FY 2025-26 tax constants; NPS returns are market-linked and not guaranteed, so growth figures in the drawdown example are clearly labelled assumptions.

The Scheme Explained

The National Pension System is a defined-contribution retirement account regulated by the PFRDA. In the corporate model, an employer registers with a Point of Presence and routes contributions into each employee's Tier I NPS account. Section 80CCD splits the deductions into three distinct sub-sections, and the difference between them is the single most misunderstood point in NPS tax planning for FY 2025-26.

The table shows why the employer route is the one that matters if you have opted for the new regime. Both 80CCD(1) and the celebrated 80CCD(1B) Rs 50,000 top-up are switched off the moment you choose the new regime for FY 2025-26 — a point worth stating plainly because it is the most common mistake made when comparing regimes. Only Section 80CCD(2) crosses over, and it does so with a higher ceiling of 14 per cent rather than 10 per cent, as confirmed on the PFRDA NPS-for-corporates page.

"Salary" for the 80CCD(2) calculation means basic pay plus dearness allowance, not gross cost-to-company. So an employee with basic-plus-DA of Rs 12,00,000 a year can have up to Rs 1,68,000 (14 per cent) routed into NPS by the employer and deducted in full under the new regime, against a ceiling of Rs 1,20,000 (10 per cent) under the old regime. Employers may structure the split equally — for example 10 per cent from each side — or unequally, such as 10 per cent employee and 14 per cent employer, as PFRDA permits both. You can model the accumulation on the NPS calculator and read the mechanics of the account itself in our NPS glossary entry.

There is a matching benefit on the employer's side. The contribution an employer makes to an employee's NPS account is an allowable business expense under Section 36(1)(iv)(a) of the Income-tax Act, 1961, which is precisely why corporate NPS is attractive to finance teams: the same rupee reduces the company's taxable profit and lands, untaxed at that moment, in the employee's retirement corpus.

One ceiling applies across the board. Under Section 17(2)(vii), the aggregate of an employer's contributions to your recognised provident fund, approved superannuation fund and NPS is a taxable perquisite to the extent it exceeds Rs 7,50,000 in a financial year, and the annual accretion on that excess is taxed under Section 17(2)(viia). For most salaried employees the 14 per cent NPS figure sits comfortably below this Rs 7.5 lakh combined cap, but high earners stacking a generous EPF and superannuation on top should check the aggregate.

Tax on Withdrawal

The NPS enjoys what is often called Exempt-Exempt-Exempt treatment at the accumulation and partial-withdrawal stages, but the exit at superannuation is only partly tax-free, and understanding the split is essential before you retire.

On normal exit at the age of 60, up to 60 per cent of the accumulated corpus may be withdrawn as a lump sum that is fully exempt from tax under Section 10(12A) of the Income-tax Act, 1961. The remaining minimum of 40 per cent must be used to purchase an annuity from a PFRDA-empanelled insurer, under the PFRDA exit regulations. The lump sum carries no tax; the annuity, however, is taxed as income at your slab rate in each year you receive it.

The annuity pension is where the new regime's slab structure becomes relevant. For FY 2025-26 the new regime is tax-free up to Rs 4,00,000, then charges 5 per cent from Rs 4,00,000 to Rs 8,00,000 and 10 per cent from Rs 8,00,000 to Rs 12,00,000. Critically, the Section 87A rebate in the new regime has risen to Rs 60,000 for FY 2025-26 and applies up to a total income of Rs 12,00,000 — so a retiree whose annuity is the only income, and falls within that Rs 12 lakh ceiling, pays nil tax on the pension after the rebate. The old regime's 87A rebate remains only Rs 12,500 up to Rs 5,00,000 by comparison.

Do note that 80CCD(1B) and 80CCD(1) are unavailable in the new regime, so the deductions that shelter the accumulation stage differ sharply between regimes even though the withdrawal rules are identical. The annuity itself is taxed the same way whichever regime you were in while contributing. Our annuity glossary entry explains how the pension stream is constructed, and the annuity-vs-SWP calculator lets you compare the mandatory annuity against a systematic withdrawal alternative on the 60 per cent lump sum.

Worked Drawdown

Consider an employee, aged 35, whose basic-plus-DA is Rs 12,00,000 a year and whose employer routes the full 14 per cent — Rs 1,68,000 a year — into NPS under the new regime, deducted in full under Section 80CCD(2). Assume, purely for illustration, a level contribution and an assumed 10 per cent annual return (NPS is market-linked and returns are not guaranteed). The corpus builds as follows.

At age 60 the Rs 1.65 crore corpus is split under the exit rules described above. Sixty per cent — about Rs 99.1 lakh — can be taken as a lump sum entirely exempt under Section 10(12A). The mandatory 40 per cent, roughly Rs 66.1 lakh, buys an annuity; at an assumed annuity rate of 6.5 per cent that produces about Rs 4.30 lakh a year, or roughly Rs 35,800 a month, taxed at slab. Because Rs 4.30 lakh sits below the Rs 12,00,000 rebate ceiling, a retiree with no other income pays nil tax on that pension in the new regime after the Rs 60,000 Section 87A rebate.

Now measure the cost of the 4-percentage-point cap difference. Had the same employee been in the old regime, the deductible employer contribution would have been capped at 10 per cent, or Rs 1,20,000 a year rather than Rs 1,68,000.

The extra 4 percentage points of deductible employer contribution — Rs 48,000 a year in this example — compounds into roughly Rs 47 lakh of additional retirement corpus over 25 years at the assumed 10 per cent return, and every rupee of that Rs 48,000 is deducted from taxable income in the year it is paid. That is the arithmetic that makes 80CCD(2) the standout deduction of the new regime. You can stress-test these numbers with your own salary, return and annuity assumptions on the retirement drawdown calculator.

A closing caution on sequencing: the 60 per cent lump sum is exempt only at superannuation or on attaining 60, and the 40 per cent annuitisation is mandatory, so NPS is genuinely a locked retirement product rather than a flexible savings pot. If liquidity before 60 matters to you, read our explainer on NPS partial withdrawals under the 2024 PFRDA master circular before committing a large share of savings to the scheme.

FAQ

Is Section 80CCD(2) really available in the new tax regime for FY 2025-26?

Yes. Section 80CCD(2), covering the employer's contribution to your NPS account, is one of the few deductions that survives in the new regime, and it is available up to 14 per cent of salary (basic plus dearness allowance) there, against 10 per cent under the old regime, per the PFRDA NPS-for-corporates rules. By contrast, Section 80CCD(1B)'s Rs 50,000 self-contribution top-up is not available in the new regime.

What counts as "salary" for the 10 per cent and 14 per cent limits?

For Section 80CCD purposes, salary means basic pay plus dearness allowance, not gross cost-to-company or total earnings. So on basic-plus-DA of Rs 12,00,000, the 14 per cent new-regime cap is Rs 1,68,000 a year and the 10 per cent old-regime cap is Rs 1,20,000 a year.

How much of the NPS corpus is tax-free when I retire at 60?

Up to 60 per cent of the accumulated corpus can be withdrawn tax-free as a lump sum under Section 10(12A) of the Income-tax Act, 1961, on exit at age 60. The remaining minimum of 40 per cent must be annuitised through a PFRDA-empanelled insurer, and the resulting annuity is taxed at your slab rate in each year of receipt.

Is there a ceiling on how much employer NPS contribution stays tax-free?

Yes. Under Section 17(2)(vii), the combined employer contribution to your provident fund, approved superannuation fund and NPS is a taxable perquisite to the extent it exceeds Rs 7,50,000 in a financial year, with the accretion on the excess taxed under Section 17(2)(viia). The 14 per cent NPS figure alone is usually well within this Rs 7.5 lakh cap.

Does the employer get a tax benefit for contributing to my NPS?

Yes. The employer's NPS contribution is an allowable business expense under Section 36(1)(iv)(a) of the Income-tax Act, 1961, reducing the company's taxable profit while adding, untaxed at that stage, to your retirement corpus.

Will the annuity from my NPS be taxed?

Yes, the annuity is taxed at your slab rate in the year of receipt, unlike the exempt 60 per cent lump sum. However, under the new regime for FY 2025-26 the Section 87A rebate of Rs 60,000 applies up to a total income of Rs 12,00,000, so a retiree whose annuity is the sole income and stays within that ceiling can end up paying nil tax on the pension.

Can I choose the new regime just to get the 14 per cent NPS cap?

The 14 per cent Section 80CCD(2) ceiling is one input among many. Switching to the new regime also forfeits 80C, 80CCD(1B), HRA relief and most other deductions, so the right choice depends on your full deduction profile. Compare both regimes against your actual numbers before deciding, and treat the higher NPS cap as a benefit of the new regime rather than a reason to choose it in isolation.