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NPS Deductions in the New Tax Regime: What Investors Need to Know

Understand how NPS deductions work under India’s new tax regime. Learn what tax benefits still apply for salaried and self-employed individuals, the role of employer contributions, and whether NPS remains a smart retirement choice in 2025.

Retirement planning in India is slowly entering a new era of simplicity and self-responsibility. With the introduction of the new income tax regime, the government has taken a decisive step toward a cleaner, deduction-free tax system. The goal is straightforward lower tax rates, minimal paperwork, and fewer exemptions to claim. But this structural shift has also raised a big question in the minds of investors: what happens to tax-efficient instruments like the National Pension System (NPS)?

For years, NPS has been one of the most effective tools for building a retirement corpus while saving tax at the same time. It encouraged salaried and self-employed individuals to lock in long-term savings, enjoy market-linked growth, and benefit from multiple tax deductions across different sections of the Income Tax Act.

However, the new regime changes that equation. Since it removes most deductions and exemptions under Sections 80C and 80D, many investors wonder if NPS still offers any advantage, or if it's now just another voluntary investment with no tax edge. The truth is more nuanced.

Even under the new tax structure, certain specific NPS deductions still survive and for salaried employees in particular, they can make a meaningful difference to take-home income and long-term savings. Let's break down how NPS fits into the new regime, what deductions are still available, and whether it remains a strong choice for your retirement plan.

A Quick Refresher: The New Tax Regime Explained

The new income tax regime (Section 115BAC) was introduced to simplify how individuals are taxed. Instead of juggling multiple exemptions and proofs, taxpayers can now choose a flat structure of lower tax rates with minimal deductions.

Here's the trade-off:

If you stay in the old regime, you get to claim deductions under 80C, 80D, 24(b), and more
If you opt for the new regime, you enjoy lower tax rates but lose most of those deductions.

While this approach streamlines compliance, it has raised concerns about reduced incentives for saving and investing in long-term instruments. In this landscape, NPS remains one of the few products that still retains partial tax advantages, even within the new system.

What Deductions Are Still Available Under the New Tax Regime

Under the new structure, most individual deductions for NPS contributions like those under Sections 80CCD(1) and 80CCD(1B) are no longer available. However, the employer contribution continues to be a powerful tax-saving provision.

Employer's Contribution to NPS (Section 80CCD(2))

This is the key deduction that still applies, making NPS one of the rare instruments to retain its tax relevance.
- The employer can contribute up to 14% of basic salary plus dearness allowance for private sector employees, and government employees
- This contribution is fully deductible from the employee's taxable income under Section 80CCD(2)
- The total exemption cap across employer contributions to NPS, EPF, and superannuation funds is ₹7.5 lakh per financial year.
This means if your employer contributes ₹1.5 lakh to your NPS, that amount is deducted from your taxable income before computing tax liability effectively lowering your tax outgo. Even in a deduction-free environment, this rule ensures that retirement contributions made by employers remain tax-efficient, keeping NPS an attractive long-term vehicle for salaried individuals.
For Self-Employed or Non-Salaried Individuals

For self-employed investors, the picture is different. The new regime has removed the deductions under Sections 80CCD(1) and 80CCD(1B), which together allowed tax benefits of up to ₹2 lakh under the old regime.

This means individual NPS contributions no longer offer tax breaks in the new structure, unless there's an employer contribution component through a registered business entity.

In simple terms, if you are self-employed and invest in NPS purely on your own, you won't be able to claim tax benefits under the new regime. However, you still benefit from long-term compounding and tax-efficient withdrawal rules at maturity.

Tax Treatment of NPS on Withdrawal

Even though deduction benefits have narrowed, NPS continues to be one of the most tax-efficient retirement instruments at the time of exit.

Here's how it works when you retire at 60:

60% of the total corpus can be withdrawn as a lump sum, completely tax-free
The remaining 40% must be used to buy an annuity, which provides a monthly pension. The annuity income is taxable in the year of receipt, just like any other salary or pension.

This structure makes NPS effectively a partially exempt (EET) instrument exempt at investment through employer contribution, exempt on partial withdrawal, and taxable only at the pension income stage.

Comparison: NPS Deductions in Old vs New Regime

Category Old Tax Regime New Tax Regime

Employee Contribution (Sec 80CCD(1)) Up to ₹1.5 lakh under 80C Not allowed

Additional NPS Deduction (Sec 80CCD(1B)) ₹50,000 extra Not allowed

Employer Contribution (Sec 80CCD(2)) Up to 10% of basic + DA (14% for central govt) Up to 14% of basic + DA

Combined Employer Limit (EPF + NPS + Superannuation) ₹7.5 lakh ₹7.5 lakh

Tax on Withdrawal (upto 60%) Tax-free Tax-free

Tax on Annuity (min 40%) Taxable Taxable

In short, while the old regime allowed investors to claim deductions for both self and employer contributions, the new regime retains only the employer-linked benefit.

Should You Still Choose NPS Under the New Regime

The answer depends on your employment type and retirement goals.

If you are a salaried employee with employer contribution: NPS still offers a clear tax advantage because your employer's contribution reduces your taxable income directly. This benefit is automatic, effortless, and continues year after year.
If you are self-employed or contributing independently: You lose the tax deduction benefit, but NPS can still be worthwhile as a disciplined, low-cost, long-term investment for retirement. The compounding potential and tax-free partial withdrawal still give it an edge over traditional savings instruments.
If you are choosing between regimes: Compare your total deductions under the old regime (80C, 80CCD, 80D, home loan interest, etc.) with the tax rates under the new regime. If your deductions are limited, the new regime may still yield lower tax outgo even if you lose NPS-related benefits.

The Bigger Picture

The new tax regime represents a shift in how India views personal finance. It's a move from tax planning to income simplicity, from chasing deductions to focusing on clean, transparent earnings. Yet, amidst these reforms, NPS continues to hold its ground not just as a tax tool, but as a retirement discipline that ensures long-term financial security.

For most salaried individuals, continuing with NPS is still a smart move, especially if the employer contribution applies. For everyone else, the key lies in understanding that tax efficiency is only one part of the story. The real purpose of NPS remains what it always was: to help you retire with stability, dignity, and financial independence.