Employer NPS deduction: How to claim tax benefit in the new regime

The last big tax break left in the new regime

One conversation with HR could save you thousands in tax every year

One conversation with HR could save you thousands in tax every year Ujjal Das/AI-Generated Image

Summary:The new tax regime has eliminated most deductions, but one significant tax benefit remains for salaried employees. This story explains how the employer NPS contribution works, who can claim it and what to check before filing your tax return.

Your employer can put 14 per cent of your basic pay into NPS before tax touches it. Here is how to check for it in the return you are filing this month, and how to set it up for the year you are in.

Check your Form 16 before you file. The return due this month covers 2025-26. A private-sector employee on the new tax regime can claim an employer NPS contribution of up to 14 per cent of basic pay plus dearness allowance as a deduction. If your employer routed that money into your NPS account last year, it will show in your Form 16. Verify the figure and claim it in full.

If it is not there, no entry on the return can create it. This deduction applies only to what your employer actually contributed to your National Pension System account during the year. The remedy sits in your payslip, not your return. Set it up now, and it counts for 2026-27, with more than eight months of the year still to run.

The one deduction the new regime kept

The new tax regime removed almost every deduction that salaried taxpayers grew up with. Section 80C, house rent allowance, health insurance premiums and the extra Rs 50,000 for your own NPS contribution are all gone. Two survived: the Rs 75,000 standard deduction, which needs no action, and the employer NPS contribution, which needs a decision.

The mechanism is simple. Your employer pays a part of your salary directly into your NPS Tier 1 account. That amount never enters your taxable income. You pay tax on the rest.

Fourteen per cent, but only on the new regime

For years, government employees could receive 14 per cent of basic pay plus DA this way while private-sector employees were capped at 10 per cent. The Finance (No. 2) Act 2024, passed after the July 2024 Budget, raised the private-sector cap to 14 per cent. The higher cap applies only to those who file under the new regime. In the old regime, the private-sector limit remains 10 per cent.

Tax regime	Government employees	Private sector employees
New regime	14 per cent	14 per cent
Old regime	14 per cent	10 per cent
Cap as a share of basic pay plus dearness allowance. Source: Finance (No. 2) Act 2024

Cap as a share of basic pay plus dearness allowance. Source: Finance (No. 2) Act 2024

One housekeeping point for the year you are in. The Income-tax Act, 2025 took effect on April 1, 2026, and renumbers the old law. For income earned from 2026-27 onwards, the employer NPS deduction is governed by Section 124 of the new Act, not Section 80CCD(2). The limits and rules are unchanged. Your 2025-26 return still uses the old section numbers, but if your HR team quotes Section 124, they are reading the current law.

What the extra 4 per cent is worth

Take a basic pay plus DA of Rs 12 lakh a year. At 10 per cent, your employer could route Rs 1.2 lakh into NPS tax-free. At 14 per cent, Rs 1.68 lakh. The extra Rs 48,000 of deduction saves Rs 14,400 a year at the 30 per cent slab, about Rs 15,000 once cess is added. The full 14 per cent shields Rs 1.68 lakh from tax every year, worth over Rs 50,000 at the top slab.

Basic pay plus DA	Deduction at 10 per cent	Deduction at 14 per cent	Extra deduction	Extra tax saved at 30 per cent
Rs 6 lakh	Rs 60,000	Rs 84,000	Rs 24,000	Rs 7,200
Rs 9 lakh	Rs 90,000	Rs 1.26 lakh	Rs 36,000	Rs 10,800
Rs 12 lakh	Rs 1.2 lakh	Rs 1.68 lakh	Rs 48,000	Rs 14,400
Rs 18 lakh	Rs 1.8 lakh	Rs 2.52 lakh	Rs 72,000	Rs 21,600
Rs 24 lakh	Rs 2.4 lakh	Rs 3.36 lakh	Rs 96,000	Rs 28,800
Figures exclude the 4 per cent cess. Your actual saving depends on your marginal rate; the new-regime slabs run from 5 to 30 per cent.

The deduction also stretches the zero-tax line. The Section 87A rebate makes income up to Rs 12 lakh tax-free on the new regime, and the standard deduction lifts that to a salary of Rs 12.75 lakh. Every rupee your employer routes into NPS raises that threshold by the same rupee, because it leaves your taxable salary before the calculation begins.

The honest trade

In most private-sector pay structures, the employer's NPS contribution is carved out of your existing cost-to-company, not added to it. Your take-home pay falls by the amount that goes into NPS. What you buy with that cut is a tax-free transfer into your own retirement account, growing at market returns, at the price of liquidity.

The lock-in is real. NPS Tier 1 money stays put until age 60, except for limited partial withdrawals for specific needs. At 60, you can take 60 per cent of the corpus tax-free; the remaining 40 per cent must be used to buy an annuity, and that income is taxed as income when you receive it. A disciplined saver who would have invested the money anyway loses little and saves tax at the full marginal rate. Someone who needs every rupee of monthly take-home, or who may need the money before 60, should think twice before signing up for the full 14 per cent.

The ceiling that bites only at the top

Total employer contributions to NPS, EPF and superannuation are capped at Rs 7.5 lakh per year. Anything above that is taxed as a perquisite in your hands, along with the returns earned on the excess. With EPF at 12 per cent of basic and NPS at 14 per cent, the ceiling starts to bite at a basic pay of roughly Rs 29 lakh a year. Below that, the full 14 per cent flows through untaxed.

One question for HR this week

Ask whether your company offers corporate NPS and whether you can restructure your CTC to route 14 per cent of basic pay plus DA into it. If the answer is yes, the change applies to your next pay cycle, and your monthly TDS will fall immediately. If your company has no corporate NPS arrangement, this article is worth forwarding to whoever runs payroll; registration is a one-time exercise on the employer's side.

Two actions, then. Verify the deduction in the return you file this month if your employer already contributes. Start the paperwork this week if it does not. A year from now, the difference shows up twice: a smaller tax line on your Form 16, and a retirement account that got funded without you feeling it.

Also read: Can NPS employer contribution save tax this year?

This article was originally published on July 14, 2026.