Employer contributions to the National Pension System (NPS) on behalf of the employee are deductible under Section 80CCD(2). This is one of the most powerful deductions available in the New Regime and is NOT subject to the overall ₹1.5 lakh Section 80C cap. It reduces taxable income without any investment action required from the employee.
Deduction Limits
- Central Government employees: Up to 14% of Basic + DA
- State Government employees: Up to 14% of Basic + DA (from FY 2024-25, increased from 10%)
- Private sector employees: Up to 10% of Basic + DA
- Over and above the ₹1.5 lakh 80C limit — completely separate
Why This Matters in New Regime
- Most other deductions are not available in New Regime — this one is
- Only employer contribution is deductible under 80CCD(2); employee's own contribution is NOT deductible in New Regime
- Negotiating a higher NPS component in your CTC is an effective way to reduce taxes under New Regime
- The employer's NPS contribution is also exempt from perquisite tax in your hands
How to Optimise
- Ask your HR to restructure CTC to maximise the NPS employer contribution component
- For a ₹15 lakh CTC with basic of ₹6 lakh: 10% = ₹60,000 additional deduction
- This deduction alone can sometimes tip the balance in favour of the New Regime
- NPS account is required — open Tier-1 NPS account via eNPS or through employer
This guide reflects FY 2025-26 (AY 2026-27) and is for general information. Tax rules and limits change, and how they apply depends on your circumstances. It is not professional tax advice; consult a qualified Chartered Accountant before acting.
