New Delhi: The National Pension System (NPS) remains one of the most tax-efficient retirement savings options for salaried individuals and self-employed taxpayers in India. Whether you opt for the old tax regime with deductions or the new simplified regime, NPS contributions can help you reduce your tax liability while building a retirement corpus.
Tax Saving Under the Old Tax Regime
If you continue with the old tax system, you can claim multiple deductions for your NPS investments:
Section 80CCD(1):
You can claim up to 10 percent of your basic salary plus dearness allowance (DA) as a deduction for your own NPS contribution. This limit is part of the overall Rs 1.5 lakh deduction available under Section 80C.
Section 80CCD(1B):
In addition to the Rs 1.5 lakh 80C limit, you can claim an extra deduction of Rs 50,000 for your own contribution to NPS. This is a unique benefit of NPS and does not form part of the 80C cap, meaning you can get tax relief over and above Rs 1.5 lakh.
Section 80CCD(2):
If you are a salaried employee, your employer’s contribution to your NPS account of up to 10 percent of your salary (basic + DA) is also deductible. There is no monetary cap on this, making it another useful way to cut your tax outgo.
Combining all these sections, an individual under the old regime can potentially claim significant deductions through NPS — often much higher than other tax-saving instruments.
Tax Benefits Under the New Tax Regime
With the introduction of the new tax regime in Budget 2020, taxpayers were given the option of lower tax slabs but without most exemptions and deductions, including 80C. However, NPS contributions still receive limited tax benefits even under the new regime:
You can claim the additional Rs 50,000 deduction under Section 80CCD(1B) for your own NPS contribution.
This means that while standard 80C deductions are not available under the new regime, NPS contributions up to Rs 50,000 still help you reduce taxable income.
Keep in mind that this is one of the few remaining deductions that the new regime allows, and it makes NPS a valuable tool even if you choose lower tax slabs without other exemptions.
Key Comparison: Old vs New Regime
Under the old regime, you can claim:
80C benefits (up to Rs 1.5 lakh)
Extra Rs 50,000 under 80CCD(1B)
Employer contribution deduction under 80CCD(2)
Under the new regime, you can claim:
Only the Rs 50,000 deduction under 80CCD(1B)
This means the old regime generally offers more tax savings when NPS contributions are significant. But if your annual income is lower or your total deductions are limited, the new regime may still be beneficial.
Example for Clarity
Suppose you contribute Rs 1,50,000 to NPS in a year:
Under the old regime:
Rs 1,50,000 can go into Section 80C,
Plus Rs 50,000 extra under 80CCD(1B),
Plus employer contribution benefits under 80CCD(2).
Under the new regime:
Only Rs 50,000 can be claimed under 80CCD(1B).
This shows how the old tax system can lead to even greater immediate tax savings, while the new regime still offers a meaningful benefit.
Final Takeaway
The NPS continues to be a powerful retirement savings and tax planning tool. If you are eligible for the old tax regime, you can maximise your deductions by strategically using Sections 80C, 80CCD(1B) and 80CCD(2). Even under the new regime, you don’t lose the Rs 50,000 tax break for your NPS contribution.
Before deciding on your tax strategy, consider your income level, retirement goals and whether you benefit more from the old or new tax structure. Consulting with a tax advisor can help tailor the best approach for your situation.
