NPS Tax Benefits Under the New Tax Regime (FY 2025–26): The Complete Picture

You switched to the new tax regime — or your employer defaulted you into it — and now you're wondering whether your NPS contributions still save any tax. The short answer: two out of three NPS deductions are gone, but one survives and is actually more generous than before. This article breaks down exactly which deductions exist under each regime for FY 2025–26 (AY 2026–27), what Budget 2024 changed for private sector employees, and the one salary restructuring move that can save ₹60,000–₹1.5 lakh in taxes annually without costing you a rupee of take-home pay. If you want to compare your NPS corpus under both scenarios, use CalcPhi's NPS Calculator.

The NPS Deductions That Are Gone Under the New Tax Regime

Under the old tax regime, NPS offered three layers of tax deduction. Two of those three are unavailable under the new regime.

Section 80CCD(1) — employee contribution: Under the old regime, your own NPS contributions were deductible up to 10% of basic salary + DA, counted within the overall ₹1.5 lakh Section 80C bucket. Under the new regime, this deduction does not exist. Your voluntary NPS contributions reduce your NPS corpus by nothing on the tax side — the money goes into your account, but CBDT does not give you a deduction for it.

Section 80CCD(1B) — the additional ₹50,000: This is the one most people ask about. Under the old regime, you could claim an extra ₹50,000 in deductions for NPS Tier 1 contributions, entirely above and beyond the ₹1.5 lakh 80C limit. At the 30% slab, that deduction was worth ₹15,600 per year in tax savings (₹50,000 × 30% + 4% cess). Under the new tax regime, this deduction is not available. If you are contributing ₹50,000 per year to NPS purely for the 80CCD(1B) benefit and you are already in the new regime, you are getting no additional tax benefit from it.

This matters because most competitor articles still describe 80CCD(1B) as a major NPS advantage without clearly stating it is an old-regime-only benefit. Under the new regime, which became the default for salaried employees from FY 2023–24, it does not apply.

NPS deductions: old regime vs new regime (FY 2025–26)

Deduction	What it covers	Old regime	New regime	Max tax saving (30% slab)
80CCD(1)	Employee NPS contribution, within 80C ₹1.5L	Available	Not available	Up to ₹46,800/yr (part of 80C)
80CCD(1B)	Extra ₹50,000 above 80C	Available	Not available	₹15,600/yr
80CCD(2)	Employer NPS contribution	Up to 10% of basic	Up to 14% of basic	Varies by salary
60% lump sum at exit	NPS Tier 1 withdrawal at age 60	Tax-free	Tax-free	Same under both

The One NPS Benefit That Survives: Section 80CCD(2)

Section 80CCD(2) — the deduction for your employer's NPS contribution — is available under both the old and new tax regimes. And Budget 2024 (Finance Act 2024, effective from FY 2024–25) extended a meaningful upgrade to private sector employees: the deduction limit was raised from 10% of basic salary to 14% of basic salary, matching what central government employees already had.

This is a deduction entirely separate from 80C and 80CCD(1B). It covers contributions made by your employer into your NPS Tier 1 account. You do not claim it on personal contributions — it applies only to what your employer puts in. The key condition: the contribution must not exceed 14% of your basic salary + DA for private employees.

One important ceiling to know: combined employer contributions to NPS, EPF, and superannuation above ₹7.5 lakh per year become taxable as a perquisite under Section 17(2) of the Income Tax Act. For most employees earning ₹12–30 lakh, this cap is not a concern — but if your EPF + NPS employer contributions together approach ₹7.5 lakh, you need to calculate carefully.

Worked example: ₹15 lakh basic salary

Consider Vikram, a 35-year-old software engineer at a Bengaluru IT firm. His basic salary is ₹15 lakh per year. He is in the new tax regime.

• His employer restructures his CTC to include NPS contribution at 14% of basic: 14% × ₹15 lakh = ₹2.1 lakh per year
• This ₹2.1 lakh is fully deductible under Section 80CCD(2) in the new regime
• Tax saving at 30% slab + 4% cess: ₹2,10,000 × 30% × 1.04 = ₹65,520 per year
• The ₹2.1 lakh does not disappear — it goes directly into Vikram's NPS Tier 1 account and grows tax-deferred until retirement

For someone with ₹25 lakh basic, the same 14% route yields ₹3.5 lakh in employer NPS contribution — a deduction worth over ₹1.09 lakh in annual tax savings. Compare this against zero deduction from voluntary 80CCD(1B) contributions in the new regime and the priority is clear.

To see how this employer contribution compounds into a retirement corpus over 20–25 years, run the numbers on CalcPhi's NPS Calculator.

Should You Make Voluntary NPS Contributions Under the New Tax Regime?

For tax saving: no. There is no deduction benefit for voluntary NPS contributions under the new regime. Putting ₹50,000 into NPS Tier 1 as a voluntary contribution does not reduce your taxable income by a rupee if you are in the new regime.

For retirement savings: the case is different. NPS equity funds have historically delivered 13–17% CAGR depending on the fund manager (SBI Pension Funds, HDFC Pension Fund, ICICI Prudential Pension Fund, Kotak Pension Fund). The expense ratios are among the lowest of any investment product in India — as low as 0.01% per annum for some fund managers, cheaper than most direct equity mutual funds. The entire corpus inside NPS also compounds tax-deferred; unlike a mutual fund, you are not paying capital gains tax each time the fund rebalances internally.

The decision framework:

• If you are in the new regime and the goal is tax saving: skip voluntary NPS. Redirect that ₹50,000 into a direct equity mutual fund — you get more liquidity, no mandatory annuity at exit, and comparable return potential.
• If you are in the new regime and the goal is ultra-low-cost, long-horizon equity exposure: NPS is still a reasonable vehicle, provided you understand and accept the lock-in until age 60 and the 40% annuity requirement at exit.
• If you are in the old regime: voluntary NPS contributions up to ₹50,000 under 80CCD(1B) still deliver ₹15,600/year in tax savings and belong in your 80C planning. See the full breakdown in our guide on NPS Tier 1 vs Tier 2.

The New Regime NPS Strategy in Practice

If you are in the new tax regime, here is the three-step approach to extract the maximum tax benefit from NPS:

Step 1: Request employer NPS contribution as part of CTC restructuring. Most HR teams default to 12% EPF employer contribution and nothing more. Request that your employer also route a portion of your CTC into NPS Tier 1 under Section 80CCD(2). The ask is legitimate, legal, and tax-advantaged for both you and the employer (employers also get a deduction under Section 36(1)(iva) of the Income Tax Act for NPS contributions made on your behalf, subject to the same 14% limit). The ₹2.1 lakh in the Vikram example above is not additional money from your employer — it comes from restructuring your existing CTC, redirecting a part from gross salary (which is taxable) to employer NPS contribution (which is deductible).

Step 2: Do not make voluntary 80CCD(1B) contributions if you are in the new regime. Redirect that ₹50,000 per year into a direct equity mutual fund SIP. You get the same return potential, full liquidity, and no mandatory annuity at exit. The only reason to keep voluntary NPS contributions is if you want the forced lock-in as a behavioural savings mechanism — a valid reason, but not a tax reason.

Step 3: At retirement, the 60% lump sum from NPS Tier 1 remains tax-free. This benefit survives regardless of which tax regime you were in during your working years. Plan your NPS corpus target accordingly — and use the NPS Calculator to see what your employer contribution trajectory grows to by age 60.

To figure out whether the old or new regime gives you a better total outcome given your specific deductions, use CalcPhi's New vs Old Regime Calculator with your actual numbers.

Old Regime vs New Regime — Full NPS Tax Comparison

Complete NPS deduction comparison: old vs new tax regime (FY 2025–26, AY 2026–27)

Deduction type	Old regime	New regime	Max annual benefit at 30% slab + cess
80CCD(1) — employee contribution (within 80C ₹1.5L)	Available	Not available	Part of ₹46,800 overall 80C saving
80CCD(1B) — extra ₹50,000 NPS deduction	Available	Not available	₹15,600/yr
80CCD(2) — employer contribution (private employees)	Up to 10% of basic salary	Up to 14% of basic salary	Depends on salary (₹65,520/yr on ₹15L basic)
Combined employer cap (NPS + EPF + superannuation)	₹7.5 lakh/yr (above this is taxable perquisite)	₹7.5 lakh/yr (same cap)	Same under both regimes
60% lump sum withdrawal at age 60	Tax-free	Tax-free	Same under both regimes
Annuity income (40% of corpus)	Taxed at applicable slab rate	Taxed at applicable slab rate	Same under both regimes

Frequently Asked Questions

• Is the ₹50,000 NPS deduction under 80CCD(1B) available in the new tax regime?

  No. Section 80CCD(1B) is available only under the old tax regime. Under the new regime — which became the default for salaried employees from FY 2023–24 — you cannot claim the additional ₹50,000 NPS deduction. The only NPS-related deduction available in the new regime is the employer contribution under Section 80CCD(2), up to 14% of basic salary for private sector employees.

• What NPS deduction is available under the new tax regime?

  Only Section 80CCD(2) — covering your employer's NPS contribution — survives under the new tax regime. For private sector employees, this allows a deduction of up to 14% of basic salary plus DA (raised from 10% by Finance Act 2024, effective FY 2024–25 onwards). Employee voluntary contributions — whether under 80CCD(1) or 80CCD(1B) — are not deductible in the new regime.

• Should I continue NPS contributions if I switched to the new tax regime?

  For tax saving: voluntary NPS contributions give you no deduction in the new regime, so there is no tax rationale. For retirement savings: NPS remains a strong long-term vehicle — NPS equity funds have delivered 13–17% CAGR historically at expense ratios as low as 0.01%. The better strategy under the new regime is to restructure your CTC to maximise employer NPS contribution via 80CCD(2), and redirect the ₹50,000 you would have put into 80CCD(1B) into a direct equity mutual fund for better liquidity and no annuity obligation at exit.

• What is the maximum employer NPS contribution deductible under Section 80CCD(2)?

  For private sector employees, Section 80CCD(2) allows a deduction of up to 14% of basic salary plus DA, as amended by Finance Act 2024 (effective FY 2024–25 onwards). There is no fixed rupee cap under 80CCD(2) itself. However, combined employer contributions to NPS, EPF, and superannuation above ₹7.5 lakh per year are treated as a taxable perquisite under Section 17(2) of the Income Tax Act. For most employees earning up to ₹40–50 lakh, this overall cap is not a binding constraint when combined EPF + employer NPS is calculated.

• Is the NPS lump sum withdrawal tax-free under the new tax regime?

  Yes. The 60% lump sum withdrawal from NPS Tier 1 at age 60 is exempt from income tax under Section 10(12A), regardless of which tax regime you were in during your working years. The remaining 40% of your corpus must be used to purchase an annuity, and the annuity income is taxed at your applicable slab rate in retirement — this rule also applies under both regimes.