Understanding How NPS Contributions Reduce Tax Under Old and New Regimes

The National Pension System (NPS) continues to be one of India’s most tax-efficient retirement savings instruments, offering dual benefits of wealth creation and tax reduction. With rising interest in long-term financial planning, understanding how NPS works under both tax regimes is crucial for salaried and self-employed individuals.

Under the old regime, taxpayers can claim deductions up to ₹1.5 lakh under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B), totaling ₹2 lakh. Employer contributions under Section 80CCD(2) are also deductible, subject to 10% of salary for private employees and 14% for government employees.

In the new regime, while most deductions are removed, employer contributions to NPS under Section 80CCD(2) remain exempt, making it a valuable benefit for salaried individuals.

Key highlights

• Old regime: Up to ₹2 lakh deductions (₹1.5 lakh + ₹50,000).
• Employer contributions: Deductible up to 10% of salary (private) or 14% (government).
• New regime: Employer contributions under Section 80CCD(2) still tax-free.
• Dual benefit: Retirement corpus creation + tax efficiency.

Applicability: Salaried, self-employed, and freelancers can benefit.

Sources: News18; Zee News; Goodreturns