Can NPS employer contribution save tax this year?

My employer is offering to contribute to the National Pension System (NPS) through the fle1xi-benefit plan. But since there are no tax deductions for NPS under the new tax regime, does it still make sense to opt for it? - Anonymous

Let's first understand why the National Pension Scheme is a good-for-you investment.

One, it is one of the most effective ways to build a retirement corpus, especially if you struggle with staying disciplined over the long term. Many investors start saving with good intent but end up withdrawing or reallocating those funds for short-term needs like vacations, home upgrades or emergencies.

NPS is designed to protect your retirement savings from such detours. It has limited liquidity and a long lock-in, allowing only partial withdrawals under specific conditions (like critical illness, higher education or buying a home). While this may seem restrictive, it actually acts as a built-in safeguard, helping you avoid dipping into funds meant for your post-retirement life.

Add to this its low-cost and professionally managed investment structure, NPS becomes a powerful, long-term savings vehicle. The fund management charges are among the lowest in the industry, which means more of your money stays invested and compounds over time.

Tax benefit

Now, coming to the tax angle, even though the new tax regime doesn't allow deductions for your own NPS contributions under Section 80C, the tax benefit on employer contributions under Section 80CCD(2) still stands.

Under this provision, employer contributions of up to 14 per cent of basic salary and dearness allowance are tax-deductible.

So, if your basic salary is Rs 1 lakh per month and your employer contributes 14 per cent, that's Rs 14,000 per month or Rs 1.68 lakh per year. This entire amount is deductible from your taxable income under Section 80CCD(2).

So even if you've moved to the new tax regime, this employer contribution continues to lower your tax outgo, making it one of the few meaningful deductions still available.

Also read: Should you invest in NPS Vatsalya?

This article was originally published on April 14, 2025.