Tax Benefits of the National Pension System (NPS) for FY 2024–25

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

• Section 80CCD(1) – Employee’s Contribution: Salaried individuals can claim a deduction for their own NPS contributions up to 10% of (Basic + DA) (Dearness Allowance) of salary. Self-employed contributors get a similar benefit of up to 20% of their gross income. These limits are subject to the overall ceiling of ₹1.5 lakh under Section 80CCE (i.e. combined 80C/80CCC/80CCD(1)). In practice, this means an employee can invest up to ₹1.5 lakh in NPS (as part of 80C) and claim it as a deduction.
• Section 80CCD(1B) – Additional NPS Deduction: On top of the above limit, investors get an extra ₹50,000 deduction specifically for NPS contributions. This is over and above the ₹1.5 lakh 80C cap, effectively allowing up to ₹2 lakh of total deductions if you invest the full amount in NPS (e.g. ₹1.5L under 80C + ₹0.5L under 80CCD(1B)). According to experts, salaried taxpayers can “claim an additional deduction of ₹50,000 … for their own contributions to NPS which is over and above the ₹1.5 lakh limit”.
• Section 80CCD(2) – Employer’s Contribution: Contributions made by an employer (including by Central/State governments) to an employee’s NPS account are also tax-deductible. The full amount of the employer’s contribution is allowed, subject to limits. For government employees, up to 14% of salary (Basic + DA) can be claimed. For private-sector employees, the limit has long been 10% of salary, but recent rules have changed this (see below). Importantly, employer contributions are exempt from the ₹1.5 lakh 80C cap – they are over and above that limit. In other words, a private company’s NPS contribution for you does not reduce your ₹1.5 lakh 80C space.

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:

• PPF: A long-term government-backed savings scheme. Investments up to ₹1.5 lakh per year qualify for deduction under Section 80C. The interest rate (currently ~7.1%) is completely tax-free, and the full maturity amount (principal + interest) is also tax-exempt. In short, PPF is a fully EEE instrument: exempt investments (80C), exempt interest, and exempt maturity.
• EPF: Mandatory for most salaried workers. Both employee and employer typically contribute 12% of (Basic + DA). The employee’s 12% EPF contribution qualifies for 80C deduction (within the ₹1.5 lakh limit). The employer’s 12% contribution is tax-exempt (it’s not counted in your taxable salary) up to an overall annual cap of ₹7.5 lakh on combined employer contributions to EPF, NPS, and superannuation fund. Interest on EPF is fully tax-free (currently 8.25% for FY2023–24). EPF is also effectively EEE (after 5 years of service), but note that voluntary top-up (VPF) also gets 80C.
• NPS: Contributions are eligible for deductions as described above (80CCD). This allows higher tax-saving contributions than PPF/EPF because NPS has the extra ₹50K (80CCD(1B)) beyond 80C. At retirement, only 60% of the corpus is tax-free (the rest funds an annuity). So unlike PPF/EPF which give 100% tax-free exit, NPS is partly taxable at pay-out. However, experts note that “NPS offers the best [tax] benefits” for those who can take market risk, largely due to its additional deduction limits. In practice, a balanced strategy often means using all three: claim the maximum 80C+80CCD deductions via PPF/EPF/NPS, and enjoy the tax-free growth and exit in PPF/EPF while leveraging NPS for its extra deductions and diversification.