The National Pension System (NPS) continues to be one of the most popular retirement savings options in India.
Apart from helping you build a retirement corpus, NPS also offers attractive tax benefits.
However, the tax savings you can claim depend on whether you choose the old tax regime or the new tax regime.
If you’re planning your taxes for FY 2026-27, here’s a simple breakdown of how NPS can help you reduce your tax liability.
NPS Tax Benefits Under the Old Tax Regime
Taxpayers who opt for the old tax regime can claim deductions of up to ₹2 lakh through their own NPS contributions.
Deduction Under Section 80CCD(1)
You can claim a deduction for contributions made to your NPS account.
Salaried employees: Up to 10% of Basic Salary + Dearness Allowance
Self-employed individuals: Up to 20% of Gross Total Income
Maximum deduction allowed: ₹1.5 lakh (within the overall Section 80C limit)
Additional ₹50,000 Deduction Under Section 80CCD(1B)
One of the biggest advantages of NPS is the extra deduction available under Section 80CCD(1B).
Additional deduction: Up to ₹50,000
Available over and above the ₹1.5 lakh limit
This means taxpayers can claim total deductions of up to ₹2 lakh through self-contributions to NPS under the old tax regime.
Employer Contribution Can Increase Tax Savings Further
NPS becomes even more attractive when your employer contributes to your account.
Under Section 80CCD(2), employer contributions are eligible for additional tax benefits.
Up to 14% of salary for Central and State Government employees
Up to 10% of salary for other employees
The best part is that this deduction is separate from the ₹2 lakh limit available through personal contributions.
What Tax Benefits Are Available Under the New Tax Regime?
The new tax regime offers fewer deductions compared to the old regime.
However, NPS still provides one major tax-saving benefit.
Employees can claim deductions for employer contributions made to their NPS account under Section 80CCD(2).
For both private and government employees, employer contributions of up to 14% of Basic Salary and Dearness Allowance can be claimed as a deduction.
This can significantly reduce taxable income even under the new tax regime.
Why Employer NPS Contributions Are Important
Tax experts believe employer contributions to NPS are among the few effective tax-saving options still available under the new regime.
Employees can request their employers to structure a portion of their salary package as an NPS contribution.
This helps reduce taxable income while simultaneously building a retirement fund.
Since most traditional deductions are unavailable under the new regime, employer NPS contributions have become a valuable tax-planning tool.
How Much Tax Can You Save?
The actual tax savings depend on your income and tax slab.
For taxpayers in higher tax brackets, the additional ₹50,000 deduction under Section 80CCD(1B) alone can result in tax savings of around ₹15,600 under the old tax regime.
If employer contributions are also included, the total tax savings can be significantly higher.
Common Mistakes Taxpayers Make While Claiming NPS Deductions
Many taxpayers lose out on benefits or face issues while filing their Income Tax Returns (ITR) because of simple mistakes.
Some common errors include:
Claiming deductions under the wrong section
Mixing up employee and employer contributions
Claiming old-regime deductions while filing under the new regime
Exceeding the permitted deduction limits
Reporting figures that do not match Form 16 or payroll records
Before filing your return, it is important to verify all NPS-related details carefully.
Which ITR Forms Allow NPS Deductions?
NPS deductions can generally be claimed in the following income tax return forms:
ITR-1
ITR-2
ITR-3
ITR-4
While filing the return, employee and employer contributions should be reported separately under the correct deduction sections to avoid errors or processing delays.
Old vs New Tax Regime: Which One Offers Better NPS Benefits?
For taxpayers looking to maximize NPS-related deductions, the old tax regime continues to offer greater benefits because it allows:
Up to ₹1.5 lakh deduction under Section 80CCD(1)
Additional ₹50,000 deduction under Section 80CCD(1B)
Separate deduction for employer contributions
Under the new regime, only employer contributions qualify for tax benefits.
As a result, taxpayers who actively invest in NPS may find the old regime more rewarding from a tax-saving perspective.
Why NPS Remains a Smart Tax-Saving Option
NPS offers a rare combination of retirement planning and tax savings.
Whether you choose the old or new tax regime, NPS can help reduce your tax burden while building a long-term retirement corpus.
For salaried employees especially, employer contributions can provide valuable tax relief that is difficult to find elsewhere.
If used correctly, NPS remains one of the most tax-efficient investment options available in FY 2026-27.
