📌 Key Takeaways
- The National Pension System (NPS) continues to offer tax benefits even under the new tax regime, with deductions under Section 80CCD(1B) up to ₹50,000.
- Investors can claim an additional deduction of ₹1.5 lakh under Section 80CCD(1) within the overall ₹2 lakh limit of Section 80C.
- NPS contributions by employers are tax-exempt up to 10% of salary under Section 80CCD(2), benefiting salaried individuals.
Past performance is not indicative of future results. Mutual fund investments are subject to market risks. This is for informational purposes only — consult a SEBI-registered investment adviser for personalised advice.
Why this matters now: The new tax regime dilemma for young professionals
You’ve just filed your taxes under the new regime and felt the pinch. The standard deduction of ₹75,000 is helpful, but the loss of deductions like HRA, LTA, and 80C investments can feel like a tax hike in disguise. If you’re a young professional in your 20s or early 30s, you’re likely wondering: How do I reduce my taxable income without falling back into the old regime?
Enter the National Pension System (NPS). Despite the new tax regime’s restrictions, NPS remains one of the few investment avenues that still offers tax deductions—making it a strategic tool for tax planning. Whether you’re a salaried employee, a freelancer, or a young investor just starting, understanding how NPS works under the new regime could help you save thousands in taxes while building a retirement corpus.
In this guide, we’ll break down:
- How NPS tax benefits work under the new regime
- Step-by-step ways to claim deductions
- Common mistakes to avoid
- Real-world scenarios for salaried and self-employed individuals
- Tools to get started easily
Let’s dive in.
The core concept: How NPS tax benefits work under the new regime
Under the new tax regime (introduced in FY 2020-21), most deductions under Chapter VI-A (like 80C, 80D, etc.) are not available. However, NPS enjoys a unique exception due to its social security mandate. Here’s how it works:
1. Section 80CCD(1): Deduction for your own contribution
- You can claim a deduction of up to ₹1.5 lakh under this section.
- This is within the overall ₹2 lakh limit of Section 80C (if you’re also investing in PPF, ELSS, etc.).
- Example: If you invest ₹1.5 lakh in NPS and ₹50,000 in PPF, your total deduction under 80C + 80CCD(1) is ₹2 lakh.
2. Section 80CCD(1B): Additional deduction for NPS
- This is the real game-changer. You can claim an extra ₹50,000 deduction exclusively for NPS contributions.
- This deduction is over and above the ₹1.5 lakh limit of Section 80CCD(1).
- Total possible deduction: ₹2 lakh (₹1.5 lakh + ₹50,000).
3. Section 80CCD(2): Employer’s contribution
- If your employer contributes to your NPS, this amount is tax-exempt up to 10% of your salary (basic + DA).
- No upper limit applies here—unlike Section 80CCD(1B).
- Example: If your basic salary is ₹50,000/month, your employer can contribute up to ₹60,000/year (10% of ₹50,000 x 12) tax-free.
Key takeaway
Under the new regime, NPS is one of the few investments that still offers tax deductions, making it a strategic choice for tax planning while building retirement savings.
📊 Did You Know? Income Tax Act, 1961 (Section 80CCD)
NPS tax benefits under the new regime:
- Section 80CCD(1): Up to ₹1.5 lakh (within 80C limit)
- Section 80CCD(1B): Additional ₹50,000 (exclusive to NPS)
- Section 80CCD(2): Employer’s contribution up to 10% of salary (no upper limit)
Step-by-step guide: How to claim NPS tax benefits under the new regime
Claiming NPS tax benefits is straightforward, but the process varies slightly for salaried individuals and self-employed/others. Here’s a step-by-step breakdown:
For Salaried Individuals
Step 1: Check your employer’s NPS scheme- Many employers offer NPS as part of their retirement benefits. Ask your HR if your company has a corporate NPS scheme.
- If yes, contributions are often auto-deducted from your salary before tax.
- If your employer doesn’t offer NPS, you can open a Tier-I NPS account (mandatory for tax benefits) via:
- eNPS (online portal: https://enps.nsdl.com)
- PFRDA-registered banks/brokers (SBI, HDFC, ICICI, Kotak, Zerodha, etc.)
- Minimum contribution: ₹500 (initial) / ₹1,000 (annual)
- No upper limit (but tax benefits apply only up to ₹2 lakh as explained above).
- Section 80CCD(1): Report your contribution in ITR-1/ITR-2 under "Deductions under Chapter VI-A".
- Section 80CCD(1B): Claim the additional ₹50,000 in the same section.
- Section 80CCD(2): If your employer contributes, they will issue a Form 16 showing the NPS contribution. Report this in your ITR.
- If you’re contributing to NPS outside your employer’s scheme, submit proof of investment to your HR for TDS adjustments.
For Self-Employed/Freelancers
Step 1: Open a Tier-I NPS account- Use eNPS or a PFRDA-registered intermediary.
- No employer involvement—you contribute directly.
- Section 80CCD(1): Up to ₹1.5 lakh (within 80C limit).
- Section 80CCD(1B): Additional ₹50,000.
- Report in ITR-4 under "Deductions under Chapter VI-A".
- Save NPS contribution receipts for ITR filing.
- The PFRDA or your intermediary will provide an annual statement.
Pro Tip for Salaried Individuals
If your employer offers NPS, opt for it first—your contributions are auto-deducted before tax, reducing your taxable income without any extra effort. If they don’t, set up auto-debit from your bank account to ensure consistent contributions.
**Tax BenefitMaximum DeductionDeduction for self contribution₹1.5 lakhAdditional deduction for NPS₹50,000Employer contribution exemption10% of salary
Real-world scenarios: How much tax can you save?
Let’s look at three common profiles to see how NPS can reduce tax liability under the new regime.
Scenario 1: Salaried Employee (₹12 lakh annual CTC)
| Component | Amount (₹) | Taxable Income (₹) | Tax Saved (₹) |
|---|---|---|---|
| Basic Salary | 6,00,000 | 6,00,000 | - |
| HRA (exempt) | 1,80,000 | 4,20,000 | - |
| Employer NPS (10%) | 60,000 | 3,60,000 | 18,000* |
| Your NPS Contribution | 1,50,000 | 2,10,000 | 45,000** |
| Additional NPS (80CCD1B) | 50,000 | 1,60,000 | 15,000*** |
| Total Taxable Income | - | 1,60,000 | 78,000** |
*Tax saved on employer NPS: 30% slab (₹60,000 x 30%)
**Tax saved on ₹1.5 lakh NPS contribution: 30% slab (₹1.5 lakh x 30%) ***Tax saved on ₹50,000 additional NPS: 30% slab (₹50,000 x 30%) ****Total tax saved: ₹78,000
Result: Your taxable income drops from ₹4.2 lakh to ₹1.6 lakh, saving ₹78,000 in taxes.
Scenario 2: Freelancer (₹10 lakh annual income)
| Component | Amount (₹) | Taxable Income (₹) | Tax Saved (₹) |
|---|---|---|---|
| Gross Income | 10,00,000 | 10,00,000 | - |
| NPS Contribution (80CCD1) | 1,50,000 | 8,50,000 | 45,000* |
| Additional NPS (80CCD1B) | 50,000 | 8,00,000 | 15,000** |
| Total Taxable Income | - | 8,00,000 | 60,000* |
*Tax saved on ₹1.5 lakh NPS: 30% slab (₹1.5 lakh x 30%)
**Tax saved on ₹50,000 additional NPS: 30% slab (₹50,000 x 30%) ***Total tax saved: ₹60,000
Result: Your taxable income drops from ₹10 lakh to ₹8 lakh, saving ₹60,000 in taxes.
Scenario 3: Young Professional (₹6 lakh annual income)
| Component | Amount (₹) | Taxable Income (₹) | Tax Saved (₹) |
|---|---|---|---|
| Gross Income | 6,00,000 | 6,00,000 | - |
| NPS Contribution (80CCD1) | 1,50,000 | 4,50,000 | 15,000* |
| Additional NPS (80CCD1B) | 50,000 | 4,00,000 | 5,000** |
| Total Taxable Income | - | 4,00,000 | 20,000* |
*Tax saved on ₹1.5 lakh NPS: 20% slab (₹1.5 lakh x 20%)
**Tax saved on ₹50,000 additional NPS: 20% slab (₹50,000 x 20%) ***Total tax saved: ₹20,000
Result: Your taxable income drops from ₹6 lakh to ₹4 lakh, saving ₹20,000 in taxes.
Common mistakes to avoid with NPS under the new regime
NPS is a powerful tax-saving tool, but missteps can cost you. Here are the most common errors and how to avoid them:
- Mistake 1: Confusing NPS Tier-I and Tier-II accounts
- Tier-I: Mandatory for tax benefits (lock-in till 60). - Tier-II: Optional, no tax benefits, no lock-in. Many investors accidentally contribute to Tier-II, thinking it’s tax-free. - Solution: Always contribute to Tier-I for tax benefits.
Mistake 2: Not claiming the additional ₹50,000 (Section 80CCD(1B))
- Many investors only claim the ₹1.5 lakh under 80CCD(1) and miss out on the extra ₹50,000.
- Solution: Ensure you claim both deductions in your ITR.
Mistake 3: Over-contributing without considering other goals
- NPS has a lock-in till 60, making it illiquid. If you’re saving for short-term goals (e.g., buying a car in 3 years), NPS may not be suitable.
- Solution: Balance NPS with liquid investments like mutual funds or FDs.
Mistake 4: Ignoring asset allocation
- NPS defaults to an age-based allocation (e.g., 50% equity at age 30), but you can customise it.
- Solution: Review your allocation every 2-3 years to align with your risk tolerance.
Mistake 5: Not tracking employer contributions
- If your employer contributes to NPS, ensure they report it correctly in Form 16.
- Solution: Cross-check your Form 26AS for NPS contributions.
Pro tip: Optimise your NPS for maximum tax efficiency
If you’re in the 30% tax slab, prioritise NPS contributions to maximise tax savings. Here’s a smart strategy:
- First, contribute to NPS up to ₹2 lakh (₹1.5 lakh + ₹50,000) to reduce taxable income by ₹2 lakh.
- Next, explore other tax-saving options like ELSS (up to ₹1.5 lakh under 80C) or health insurance (up to ₹25,000 under 80D).
- If you have a high salary, ask your employer to increase NPS contributions (up to 10% of salary) to further reduce taxable income.
- For flexibility, consider a mix of NPS and mutual funds—NPS for tax savings and long-term growth, mutual funds for liquidity.
Example: If you earn ₹15 lakh/year and contribute ₹2 lakh to NPS, your taxable income drops to ₹13 lakh, saving ₹60,000 in taxes (assuming 30% slab).
NPS Asset Allocation GuideAge GroupEquity (%)Under 307530-406540-505050+25Note: You can customise this allocation based on your risk tolerance. For example, if you’re conservative, reduce equity exposure.
Tools and resources to get started with NPS
Getting started with NPS is easier than ever. Here are the best tools and platforms to open and manage your NPS account:
1. eNPS (Online Portal)
- Website: https://enps.nsdl.com
- Features: Open Tier-I/Tier-II accounts, contribute online, check statements.
- Fees: No account opening fee; ₹40 for Tier-II account.
- Best for: Quick and paperless NPS setup.
2. Zerodha Coin
- Website: https://zerodha.com/coin
- Features: Invest in NPS alongside mutual funds, track all investments in one place.
- Fees: No AMC for NPS (₹0 for Tier-I).
- Best for: Investors already using Zerodha for mutual funds.
3. ICICI Direct / HDFC Securities
- Features: NPS account opening + demat services, research reports.
- Fees: ₹0 for Tier-I NPS account.
- Best for: Investors who prefer full-service brokers.
4. ET Money / Paytm Money
- Features: Easy NPS contributions, goal-based investing, SIP options.
- Fees: No account opening fee.
- Best for: Beginners who want a simple interface.
5. SBI / PNB / Bank of Baroda
- Features: Physical branch support, auto-debit from savings account.
- Fees: ₹0 for Tier-I NPS account.
- Best for: Salaried individuals who prefer bank-based investments.
Pro Tip for Choosing a Platform
If you’re new to investing, start with eNPS or ET Money for simplicity. If you already use Zerodha or ICICI Direct, leverage their NPS integration to track all investments in one place.
Frequently Asked Questions (FAQs)
1. Can I claim NPS tax benefits under the new tax regime?
Yes, NPS continues to offer tax deductions under the new regime:
- Section 80CCD(1): Up to ₹1.5 lakh (within 80C limit).
- Section 80CCD(1B): Additional ₹50,000 (exclusive to NPS).
- Section 80CCD(2): Employer’s contribution up to 10% of salary (tax-exempt).
Source: Income Tax Act, 1961 (Section 80CCD) Confidence Level: 1.0
2. Is NPS better than PPF or ELSS for tax saving under the new regime?
NPS is one of the few investments still offering tax benefits under the new regime, but it’s not necessarily "better" than PPF or ELSS. Here’s how they compare:
| Feature | NPS | PPF | ELSS |
|---|---|---|---|
| Tax Benefit (New Regime) | Yes (₹2 lakh max) | Yes (₹1.5 lakh under 80C) | Yes (₹1.5 lakh under 80C) |
| Lock-in Period | Till 60 | 15 years | 3 years |
| Returns | Market-linked (5-10% CAGR) | Fixed (7-8% p.a.) | Market-linked (12-15% CAGR) |
| Liquidity | Low (partial withdrawals allowed after 3 years) | Low | High (after 3 years) |
| Best For | Long-term retirement savings | Safe, fixed returns | Short-to-medium term growth |
Source: AMFI, RBI, SEBI Confidence Level: 0.95
3. Can I withdraw NPS before 60? What are the tax implications?
Yes, you can make partial withdrawals from NPS after 3 years, but with conditions:
- Maximum withdrawal: 25% of contributions.
- Purpose: Only for specific events (education, marriage, medical emergencies, etc.).
- Taxation: The withdrawn amount is taxable as income in the year of withdrawal.
Example: If you withdraw ₹5 lakh from NPS, this amount is added to your taxable income and taxed as per your slab.
Source: PFRDA (Pension Fund Regulatory and Development Authority) Confidence Level: 1.0
4. How does NPS compare to the old tax regime for tax saving?
Under the old tax regime, you could claim deductions under 80C (₹1.5 lakh), 80CCD(1B) (₹50,000), and 80D (health insurance). Under the new regime, most of these deductions are gone, but NPS remains a standout exception.
| Tax Regime | Old Regime (FY 2023-24) | New Regime (FY 2024-25) |
|---|---|---|
| Standard Deduction | ₹50,000 | ₹75,000 |
| 80C Deduction | ₹1.5 lakh | Not available |
| 80CCD(1B) | ₹50,000 | ₹50,000 |
| 80CCD(1) | ₹1.5 lakh | ₹1.5 lakh |
| Total Deductions | Up to ₹3.5 lakh | Up to ₹2 lakh (NPS only) |
Key Takeaway: Under the new regime, NPS is one of the few ways to reduce taxable income significantly.
Source: Income Tax Department, Government of India Confidence Level: 1.0
5. Can I contribute to NPS and still invest in mutual funds?
Yes, you can contribute to both NPS and mutual funds—they serve different purposes:
- NPS: For tax savings and long-term retirement planning (lock-in till 60).
- Mutual Funds: For liquidity, flexibility, and higher growth potential (no lock-in).
Example: You can contribute ₹2 lakh to NPS (for tax benefits) and invest ₹50,000 in an ELSS fund (for growth and 80C benefits under the old regime, if applicable).
Source: AMFI, SEBI Confidence Level: 1.0
6. What happens if I opt out of NPS later? Are there penalties?
If you opt out of NPS before 60, here’s what happens:
- Exit before 10 years: Only your contributions (not returns) are refunded.
- Exit between 10-60 years: 80% of the corpus must be used to buy an annuity (pension), and the rest is paid as a lump sum.
- Exit after 60: You can withdraw 60% as a lump sum and use 40% to buy an annuity.
No penalties, but the lock-in nature means NPS is best for long-term retirement planning.
Source: PFRDA Confidence Level: 1.0
7. Can I claim NPS tax benefits if I’m in the 5% tax slab?
Yes, but the tax saved will be lower since the slab rate is 5% (vs. 20% or 30%).
Example: If you contribute ₹2 lakh to NPS:
- Tax saved: ₹10,000 (5% of ₹2 lakh).
Source: Income Tax Department, Government of India Confidence Level: 1.0
Final Thoughts: Should you use NPS under the new regime?
NPS remains a viable tax-saving tool under the new regime, offering deductions up to ₹2 lakh. It’s particularly useful for salaried individuals (employer contributions) and high-earners in the 30% slab. However, its lock-in till 60 makes it unsuitable for short-term goals. Investors should balance NPS with liquid investments like mutual funds for a diversified portfolio.
When NPS makes sense for you:
✅ You’re in the 20% or 30% tax slab and want to reduce taxable income.
✅ You’re a salaried employee with an employer contributing to NPS. ✅ You’re comfortable with long-term lock-in (till 60) for retirement. ✅ You want a market-linked pension with tax benefits.
When to avoid NPS:
❌ You need liquidity for short-term goals (e.g., buying a house in 5 years).
❌ You’re in the 5% or 10% tax slab—other investments (like ELSS) may offer better growth. ❌ You prefer fixed returns—NPS returns are market-linked and volatile.
Next Steps:
- Check your tax slab and calculate potential savings.
- Open a Tier-I NPS account via eNPS or your preferred platform.
- Set up auto-debit for consistent contributions.
- Review asset allocation every 2-3 years.
- Consult a SEBI-registered investment adviser if unsure about long-term goals.
Past performance is not indicative of future results. Mutual fund investments are subject to market risks. This is for informational purposes only — consult a SEBI-registered investment adviser for personalised advice.