There are three different NPS deductions in the Income Tax Act, they are frequently written about as if they were one, and under the new tax regime two of the three no longer exist.
That is the whole story, and getting it wrong costs in both directions: people claim deductions they are not entitled to, and miss the one that is both available and uncapped.
The three sections, and which regime each survives in
| Section | What it covers | Old regime | New regime (115BAC) |
|---|---|---|---|
| 80CCD(1) | Your own contribution, inside the ₹1.5 lakh 80C ceiling | Available | Not available |
| 80CCD(1B) | Your own contribution, extra ₹50,000 above 80C | Available | Not available |
| 80CCD(2) | Your employer's contribution | Available | Available |
Section 80CCD(1B) is the famous one. It is the "extra ₹50,000 over and above 80C" that every February listicle recommends. It is a Chapter VI-A deduction, and the new regime disallows Chapter VI-A deductions.
Most Indian salaried taxpayers are now on the new regime by default. A meaningful number are still transferring ₹50,000 into NPS each March for a deduction they cannot claim.
If you are on the new regime and you want the money in NPS for retirement reasons, fine. Just do not do it for the tax break, because there is not one.
80CCD(2) is the survivor, and it is the good one
The employer's contribution to your NPS is deductible from your taxable income under 80CCD(2), in both regimes. It survived because it represents employer money supporting retirement saving, not personal tax planning.
Two features make it unusually valuable.
It is more generous under the new regime, not less.
| Employee type | Old regime | New regime |
|---|---|---|
| Central and state government | 14% of basic + DA | 14% of basic + DA |
| Private sector | 10% of basic + DA | 14% of basic + DA |
Private-sector employees get a higher limit under the new regime. That is genuinely counterintuitive given the new regime stripped out almost everything else.
There is no rupee ceiling.
80C caps at ₹1.5 lakh. 80CCD(1B) caps at ₹50,000. 80CCD(2) has no absolute cap at all. It is purely a percentage of basic plus DA, so it scales with income:
| Basic + DA | 14% deduction available |
|---|---|
| ₹10,00,000 | ₹1,40,000 |
| ₹18,00,000 | ₹2,52,000 |
| ₹25,00,000 | ₹3,50,000 |
At ₹30 lakh CTC with a 40% basic, that is around ₹1.68 lakh of deduction. Nothing else in the new regime is in that range.
Why almost nobody uses it
Because it is not an investment decision. It is a payroll decision.
You cannot claim 80CCD(2) by transferring money anywhere. Your employer has to contribute on your behalf, which means:
- Your employer must have corporate NPS enabled.
- Your CTC has to be restructured so a slice is routed as employer NPS contribution instead of being paid as taxable salary.
That is an HR conversation, usually possible only at joining or at appraisal. There is no March deadline, no fund house advertising it, and no app reminding you. Every incentive in the ecosystem points at the ₹50,000 you can transfer yourself and away from the ₹2.5 lakh you would have to ask for.
The mechanics are neutral to the employer: they pay the same total CTC, and they get their own deduction on the contribution under Section 36(1)(iva). It costs them nothing to say yes. It is simply on nobody's list to ask.
One ceiling to watch: employer contributions to PF, NPS and superannuation combined above ₹7.5 lakh in a year are taxable as a perquisite in your hands. High earners stacking a large employer NPS on top of an already-large PF contribution hit that before they hit the 14%.
The cost the tax pitch leaves out
NPS is a pension, and the exit rules mean it.
At 60 or superannuation:
- Corpus ₹5 lakh or less: withdraw 100% as lump sum
- Above ₹5 lakh: at least 40% must buy an annuity, up to 60% comes as lump sum
- You may defer the lump sum, the annuity, or both, and stay invested to age 75
Exiting before 60:
- Corpus ₹2.5 lakh or less: withdraw 100%
- Above ₹2.5 lakh: at least 80% must buy an annuity, only 20% comes back
- All Citizens subscribers need 5 years of subscription first
That 80% figure is the one to sit with. Money you put in at 32 for a tax deduction is, in practice, not money you can get back at 45. Annuity rates in India have generally been unexciting, and the annuity income is taxable as income in the year you receive it.
This is not an argument against NPS. It is an argument against treating NPS as a tax product. As retirement money it is reasonable: low cost, equity exposure, disciplined. As a flexible investment it is poor, and the deduction is not large enough to compensate for the lock-in unless you were going to keep it until 60 regardless.
What to actually do
If you are on the new regime, which most salaried people now are:
- Stop making voluntary NPS contributions for tax reasons. 80CCD(1) and 80CCD(1B) do not exist for you.
- Ask HR whether corporate NPS is available, and whether your CTC can route up to 14% of basic + DA as employer contribution.
- Check your existing employer PF plus NPS plus superannuation against the ₹7.5 lakh perquisite ceiling before you raise the percentage.
- Only then decide whether you want additional NPS money for retirement, on its merits and not for a deduction.
If you are on the old regime, all three sections are live, and the order is: employer 80CCD(2) first because it is employer money, then 80CCD(1B) for ₹50,000 because it sits above the 80C ceiling, then 80CCD(1) only if 80C is not already full from EPF, insurance and home loan principal.
Which regime you should be on in the first place is a separate calculation, and for most people the answer changed in the last two years: see old vs new tax regime and, if you are in the ₹40 lakh plus band, HENRY tax planning.
Sources
- Income Tax Department, deductions allowable to taxpayers: 80CCD(2) limit of 14% for central and state government contributions and 10% for other employers, with 14% applying where income is chargeable under Section 115BAC(1A)
- Income Tax Act, Sections 80CCD(1), 80CCD(1B), 80CCD(2), 115BAC and 36(1)(iva)
- PFRDA exit and withdrawal framework: 40% minimum annuitisation at superannuation above ₹5 lakh, 80% on premature exit above ₹2.5 lakh, deferment permitted to age 75