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The National Pension System (NPS) is a low-cost, market-linked retirement scheme — and, unusually, it still offers a genuine tax break in the new regime through the employer route. But the NPS deductions live in three different sub-sections of 80CCD, and mixing them up is the most common error. Here is a clear map.
The three NPS deduction routes
| Section | What it covers | Limit | New regime? |
|---|---|---|---|
| 80CCD(1) | Your own contribution | Within the ₹1.5L 80C ceiling | No |
| 80CCD(1B) | Your own extra contribution | Additional ₹50,000 | No |
| 80CCD(2) | Employer's contribution | Up to 14% of basic + DA | Yes |
80CCD(1B): the extra ₹50,000 (old regime)
This is the headline benefit most people mean by "NPS tax saving". On top of the ₹1.5 lakh 80C limit, you can claim an additional ₹50,000 for your own NPS contribution under Section 80CCD(1B). Combined with 80C, that lets a taxpayer deduct up to ₹2 lakh of their own contribution. The catch: like 80C, this works only under the old regime.
80CCD(2): the route that survives the new regime
Section 80CCD(2) covers the amount your employer contributes to your NPS. It is deductible up to 14% of your basic salary + DA, and — crucially — it is one of the very few deductions still allowed under the new regime. If your employer offers a "corporate NPS" facility, you can often restructure a portion of your CTC into an employer NPS contribution and reduce tax even while on the new regime. (Note: employer contributions to EPF + NPS + superannuation above ₹7.5 lakh a year become taxable as a perquisite.)
This distinction matters enormously: if you are on the new regime, your own 80CCD(1)/(1B) contributions give you no deduction, but the employer's 80CCD(2) contribution does.
How the maturity is taxed
NPS enjoys favourable but conditional tax treatment at exit:
- At retirement (age 60), you can withdraw up to 60% of the corpus as a tax-free lump sum.
- The remaining 40% must be used to buy an annuity (a pension product). The annuity purchase itself is not taxed.
- The monthly pension you subsequently receive from the annuity is taxable at your slab rate in the year of receipt.
So NPS is close to — but not fully — tax-free at exit: the lump sum escapes tax, while the pension stream is taxed as ordinary income later, usually when your slab may be lower.
NPS vs EPF vs PPF for tax
EPF and PPF are fixed-return debt instruments with EEE-style treatment; NPS is market-linked (you choose an equity/debt mix) and can deliver higher long-run returns, but locks a portion into an annuity. For a full comparison and to project your own corpus, use the NPS calculator and the EPF calculator. For the deduction landscape overall, see the deductions guide.
Who should use which route
- Old regime, want more deduction: use 80CCD(1B) for the extra ₹50,000 on top of 80C.
- New regime: ask HR about employer NPS under 80CCD(2) — it is your main surviving deduction.
- Long horizon, comfortable with equity: NPS's growth potential complements the fixed returns of EPF/PPF.
Project your NPS corpus and tax
Estimate your retirement corpus, then compare regimes with the NPS deduction applied.
Open the NPS Calculator → Compare regimesFrequently asked questions
What is the extra ₹50,000 NPS deduction?
Section 80CCD(1B) gives an additional deduction of up to ₹50,000 for your own NPS contribution, over and above the ₹1.5 lakh 80C limit. It is available only under the old regime.
Does NPS give any benefit in the new regime?
Yes, through 80CCD(2) — the employer's contribution to your NPS, up to 14% of basic salary, is deductible even under the new regime. Your own 80CCD(1) and 80CCD(1B) contributions are not.
How is the NPS maturity amount taxed?
At retirement you can withdraw up to 60% of the corpus tax-free. The remaining 40% must buy an annuity; the annuity is not taxed at purchase but the monthly pension you receive is taxed at slab rates.
Can I use both 80C and 80CCD(1B) for NPS?
Yes. NPS contributions can count toward the ₹1.5 lakh 80C/80CCD(1) limit, and a further ₹50,000 under 80CCD(1B), so up to ₹2 lakh of your own contribution can be deductible in the old regime.