If you have moved to the new tax regime, you have probably noticed that almost every deduction you were used to claiming has disappeared. No Section 80C, no 80D health insurance, no 80CCD(1B) for your own NPS contribution, no HRA. There is, however, one deduction that survives fully intact in the new regime and, for a salaried employee, it is arguably the most powerful one left: Section 80CCD(2), the deduction for your employer’s contribution to your NPS account.
The bottom line first: if your employer routes up to 14% of your basic salary into your National Pension System (NPS) account, that entire amount is deducted from your taxable income even under the new regime. Used well, it can pull your taxable income back below the Rs. 12 lakh line and hand you a completely tax-free salary. This article explains the exact mechanics, the 14% rule, the Rs. 7.5 lakh cap most people miss, and a full worked example.
What Section 80CCD(2) actually covers
Section 80CCD(2) allows a deduction for the amount your employer contributes to your NPS Tier-I account. It is important to be clear about whose money this is. This is not your own contribution; it is a contribution the employer makes on your behalf, usually carved out of your cost-to-company (CTC). Because of this, the deduction is available over and above everything else, and crucially, it continues to be allowed in the new tax regime under Section 115BAC.
Three deductions related to NPS exist, and only one survives the new regime:
| Section | What it covers | Old regime | New regime |
|---|---|---|---|
| 80CCD(1) | Your own NPS contribution (within the Rs. 1.5 lakh 80C ceiling) | Allowed | Not allowed |
| 80CCD(1B) | Extra Rs. 50,000 for your own NPS contribution | Allowed | Not allowed |
| 80CCD(2) | Employer’s contribution to your NPS | Allowed (10% for private, 14% for govt) | Allowed at 14% for everyone |
The 14% rule for FY 2025-26
The percentage limit depends on your employer type and your regime. Until recently, private-sector employees were capped at 10% of salary. That changed: from FY 2024-25 onwards, an employee who opts for the new tax regime can claim 80CCD(2) up to 14% of salary, whether they work for the government or the private sector. This 14% limit continues for FY 2025-26 (AY 2026-27).
The “salary” for this calculation means basic salary plus dearness allowance (the DA that forms part of retirement benefits). For most private-sector employees there is no DA, so in practice the limit is simply 14% of basic salary.
| Situation | 80CCD(2) limit |
|---|---|
| Private-sector employee, new regime | 14% of basic + DA |
| Private-sector employee, old regime | 10% of basic + DA |
| Central/State government employee (either regime) | 14% of basic + DA |
Note that Section 80CCD(2) itself carries no absolute rupee cap — the ceiling is purely the percentage of salary. But there is a separate trap, explained below.
The Rs. 7.5 lakh cap most people miss
There is one aggregate ceiling to watch. Under Section 17(2)(vii), the total of your employer’s contributions to your EPF, NPS and any approved superannuation fund taken together is tax-free only up to Rs. 7.5 lakh in a financial year. Anything above Rs. 7.5 lakh becomes a taxable perquisite in your hands, and the annual investment return earned on that excess is also taxed. For the vast majority of salaried employees this ceiling is never breached, but it matters for very high earners whose combined retirement contributions are large. Below Rs. 7.5 lakh, your full 14% NPS contribution flows through as a clean deduction.
How it pulls you under the Rs. 12 lakh line — a worked example
This is where 80CCD(2) becomes genuinely valuable. In the new regime for FY 2025-26, income up to Rs. 12 lakh attracts a Section 87A rebate of up to Rs. 60,000, which makes the tax NIL. Add the Rs. 75,000 standard deduction and a salaried person earning up to Rs. 12.75 lakh pays no tax. The catch: the rebate vanishes the moment your taxable income crosses Rs. 12 lakh. A well-placed employer NPS contribution can be exactly what keeps you under that line.
Consider Rohan, a salaried employee in the new regime for FY 2025-26, with a basic salary of Rs. 9,00,000 and other taxable allowances of Rs. 3,75,000. His employer is willing to contribute 14% of basic — that is Rs. 1,26,000 — to his NPS account, or alternatively to pay that same Rs. 1,26,000 as a cash allowance.
| Particulars | Paid as cash allowance | Routed to NPS u/s 80CCD(2) |
|---|---|---|
| Basic salary | Rs. 9,00,000 | Rs. 9,00,000 |
| Other allowances | Rs. 3,75,000 | Rs. 3,75,000 |
| The Rs. 1,26,000 | Rs. 1,26,000 (cash) | Rs. 1,26,000 (to NPS) |
| Gross salary | Rs. 14,01,000 | Rs. 14,01,000 |
| Less: Standard deduction | Rs. 75,000 | Rs. 75,000 |
| Less: 80CCD(2) deduction | Nil | Rs. 1,26,000 |
| Taxable income | Rs. 13,26,000 | Rs. 12,00,000 |
| 87A rebate available? | No (income above Rs. 12 lakh) | Yes |
| Tax payable (incl. 4% cess) | Rs. 82,056 | NIL |
In the cash version, Rohan’s taxable income is Rs. 13,26,000. Tax works out to Rs. 20,000 (in the 5% slab) plus Rs. 40,000 (10% slab) plus Rs. 18,900 (15% on the Rs. 1.26 lakh above Rs. 12 lakh) = Rs. 78,900, and Rs. 82,056 after cess. In the NPS version, his taxable income lands exactly at Rs. 12,00,000, the 87A rebate applies, and his tax is zero.
The saving is Rs. 82,056 on a contribution of Rs. 1,26,000 — far more than the “expected” tax on that slice of income. That is because the deduction does double duty: it removes the Rs. 1.26 lakh from tax and it unlocks the full 87A rebate on his entire income. You can model your own numbers with our Income Tax Calculator and project the NPS corpus this builds using the NPS Calculator.
What to do to actually claim it
The single most important point: you cannot claim 80CCD(2) on your own contribution. The money must physically move from your employer into your NPS Tier-I account. That means asking your HR or payroll team to restructure your CTC so that up to 14% of basic is designated as an employer NPS contribution rather than a taxable allowance. Many employers offer a “corporate NPS” facility precisely for this. If yours does not, this is a conversation worth having during your next appraisal or offer negotiation. Our Salary Structure Planner can help you see the effect before you ask.
The honest trade-off
As a CA I would not let a client treat this as free money without a caveat. NPS is a retirement product: the money is locked until you turn 60. At exit, 60% of the corpus can be withdrawn tax-free but the remaining 40% must be used to buy an annuity, and the pension from that annuity is taxable as income in your retirement years. So you are trading present-day liquidity and a modest future tax for a large tax saving today plus a disciplined, low-cost retirement corpus. For most salaried people in their earning years — especially those hovering just above the Rs. 12 lakh line — that trade is very much worth making. Just size the contribution to your genuine long-term savings appetite, not merely to the tax it saves.
Key takeaways
- Section 80CCD(2), the deduction for your employer’s NPS contribution, is the one major deduction that survives fully in the new tax regime.
- The limit for FY 2025-26 is 14% of basic salary (plus DA) for both private and government employees who opt for the new regime; the old regime still restricts private employees to 10%.
- It is claimed on the employer’s contribution only — your own NPS deposits do not qualify in the new regime, so your CTC must be structured accordingly.
- Combined employer contributions to EPF, NPS and superannuation above Rs. 7.5 lakh a year become a taxable perquisite — a ceiling that affects only very high earners.
- Because it lowers taxable income, it can bring you back under the Rs. 12 lakh line and unlock the full Section 87A rebate — as Rohan’s example shows, saving Rs. 82,056.
- Remember the lock-in to age 60 and the taxable annuity at exit; use it as retirement saving, not just a tax trick.
Frequently Asked Questions
Is Section 80CCD(2) really available in the new tax regime?
Yes. While 80C, 80CCD(1), 80CCD(1B) and most other deductions are switched off in the new regime, Section 80CCD(2) for the employer’s NPS contribution is expressly allowed, at up to 14% of basic salary.
Can I claim 80CCD(2) on the amount I deposit into NPS myself?
No. This section only covers the contribution your employer makes on your behalf. Your own contributions would have qualified under 80CCD(1) and 80CCD(1B), but those are not available in the new regime. To benefit, the contribution must come from your employer as part of your CTC.
What counts as “salary” for the 14% limit?
Salary here means basic pay plus dearness allowance that forms part of retirement benefits. It does not include HRA, special allowances, bonus or perquisites. For most private employees with no DA, the limit is simply 14% of basic salary.
Will my employer’s NPS contribution be added to my salary before it is deducted?
Yes. The employer’s contribution is first included in your gross salary as a perquisite and then allowed as a deduction under 80CCD(2), so the net effect on taxable income is nil up to the 14% (and Rs. 7.5 lakh aggregate) limits. Anything beyond those limits stays taxable.
Does opting for employer NPS reduce my take-home pay?
It reduces your monthly cash in hand because part of your CTC is diverted into NPS instead of being paid as salary. In return you save tax now and build a retirement corpus. If your priority is maximum current liquidity, weigh that against the tax saving before restructuring your CTC.