Tax Benefits of the National Pension System (NPS) for FY 2024–25
Disclaimer: Ujjivan Small Finance Bank does not offer personal finance advice or products & is not responsible for the accuracy of the information mentioned herein. This blog is written for generic information only.
July 08, 2025

The National Pension System (NPS) is a government-backed retirement savings scheme that lets you build a pension corpus during your working years. One of its biggest attractions is the tax savings it offers on contributions. Under the latest tax laws (FY2024–25), NPS contributions are tax-deductible under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act. These deductions work alongside (and in some cases beyond) the standard ₹1.5 lakh limit under Section 80C. Below we outline the key tax deductions for NPS and how they compare to other popular retirement schemes.
NPS Tax Deductions under the Old Tax Regime
NPS Deductions under the New Tax Regime
Under India’s optional new tax regime, most exemptions and deductions are waived. However, NPS is an exception. Only the employer’s contribution (Section 80CCD(2)) remains deductible under the new regime. Section 80CCD(1) (your own contribution) and 80CCD(1B) (the extra ₹50,000) are not available if you opt for the new regime.
The good news is that the employer limit has been increased. Budget 2024 raised the cap to 14% of salary for all employees (previously, only government employees had 14%; private sector was 10%). This change (effective FY 2025–26) means under the new regime you can deduct employer contributions up to 14% of your Basic + DA. In summary: under the new tax rules, NPS deductions are limited to Section 80CCD(2), but that deduction is quite generous at 14% of salary (employer’s share).
Tax Benefits at Withdrawal (Retirement)
NPS also offers tax advantages at retirement. When you close your NPS Tier I account (e.g. at age 60), up to 60% of the total corpus can be withdrawn as a lump sum, tax-free. The remaining 40% must be used to buy an annuity (pension), and that annuity payment is taxable as income when you receive it. For example, if your NPS corpus is ₹10 lakh at exit, you can withdraw ₹6 lakh (60%) without paying any tax. (The rule used to be 40% tax-free, but was enhanced to 60% tax-free by recent government changes.)
In addition, partial withdrawals from NPS (for expenses like education, marriage, home purchase, etc.) are currently exempt from tax under Section 10(12B). Any contribution made to purchase an annuity (the 40% non-withdrawn part) is also not taxed at the time of purchase. Thus, while NPS is technically not fully EEE (Exempt-Exempt-Exempt) like PPF or EPF, it does allow a large tax-free exit pay-out (and tax-free partial withdrawals) that boost its overall tax efficiency.
NPS vs. PPF vs. EPF: Tax Comparison
It’s useful to compare NPS with other common retirement schemes – the Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) – on tax treatment:
Final Thoughts
NPS remains a very tax-efficient retirement scheme under the current rules. In the old tax regime, you can save on taxes via 80CCD(1) (up to 10% of salary), an extra ₹50K under 80CCD(1B), and employer contributions under 80CCD(2). Even under the new tax regime, the employee gains through the 14% employer deduction on NPS.
When you retire, a majority (60%) of your NPS corpus comes out tax-free. By contrast, other schemes like PPF/EPF are fully tax-exempt on exit, but they lack the higher contribution limits that NPS provides. All in all, NPS can significantly reduce your taxable income today through its deductions while still offering decent post-tax returns. As one commentator observes, NPS’s extra ₹50,000 deduction makes it “the best [tax-saving] benefits” scheme for those seeking maximum deductions.
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FAQs
1: What is the maximum NPS deduction I can claim in FY 2024–25?
In the old regime, you can claim up to ₹1.5 lakh under 80CCD(1) (as part of 80C) plus an additional ₹50,000 under 80CCD(1B). Also, employer contributions (up to 10–14% of salary) can be claimed under 80CCD(2) on top of that. In the new regime, your own NPS contributions (80CCD(1/1B)) are not deductible; only employer contributions (now up to 14% of salary) qualify.
2: Can self-employed people claim NPS deductions?
Yes. Self-employed (or non-salaried) individuals can deduct up to 20% of their gross income under Section 80CCD(1), subject to the ₹1.5 lakh overall cap. This is over and above any deductions under Section 80C.
3: How much of my NPS money is tax-free at retirement?
When you exit NPS (typically at age 60), up to 60% of your accumulated corpus can be withdrawn tax-free. The remaining 40% must buy an annuity, and only the annuity payouts will be taxed in future. Thus, if your NPS corpus is ₹10 lakh, you can get ₹6 lakh tax-free.
4: How does NPS compare to PPF and EPF for tax savings?
NPS allows higher deductions (especially the extra ₹50K under 80CCD(1B)) than PPF or EPF, which are limited to ₹1.5 lakh under Section 80C. However, PPF/EPF have the advantage of fully tax-free withdrawal. In practice, many experts recommend using all available schemes: claim the ₹1.5 lakh 80C via PPF/EPF first, and then invest further in NPS to use the extra ₹50K deduction.
5: Is employer contribution to NPS fully tax-deductible?
Yes. The entire employer contribution to your NPS account is deductible under Section 80CCD(2), subject to limits (14% of salary for government employees, 14% for private from FY2025–26 onward). Importantly, this deduction is over and above the ₹1.5 lakh 80C limit, so it does not reduce your ability to use other 80C deductions.
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