1. Three contribution deductions and a separate perquisite rule
The National Pension System (NPS) is a regulated retirement account with market-linked returns. The historical tax references here are to the Income-tax Act, 1961, including for FY 2025–26. For tax years beginning 1 April 2026, use section 124 of the Income-tax Act, 2025 and the corresponding salary, perquisite and exempt-income provisions. Regulatory withdrawal permission and income tax exemption are separate tests.
| Deduction | Limit | Regime |
|---|---|---|
| Own contribution under section 80CCD(1) | Actual eligible Tier I contribution up to 10% of salary for employees or 20% of gross total income for other individuals. Shares the ₹1.50 lakh section 80CCE limit with sections 80C and 80CCC. | Old regime |
| Additional own contribution under section 80CCD(1B) | Up to ₹50,000 beyond the ₹1.50 lakh pool. Do not claim the same contribution again. From FY 2025–26 the parent or guardian’s eligible Vatsalya payment shares this ₹50,000 limit. | Old regime |
| Employer contribution under section 80CCD(2) | Actual eligible employer contribution up to 14% of salary for Central and State Government employers; other employers generally 10% in the old regime or 14% under the default new regime from FY 2024–25. Outside the ₹1.50 lakh pool. | Both, subject to the applicable percentage |
Use the statutory salary definition: include DA where the terms of employment so provide and exclude other allowances and perquisites. Salary for the cap is not gross cost to company. Separately test the employer’s combined contributions to recognised provident fund, the specified pension scheme and approved superannuation funds. Excess over ₹7.50 lakh and prescribed accretion attributable to the taxable excess are perquisites. This is a separate inclusion test, not a ceiling on the section 80CCD(2) deduction itself. For the employer, section 36(1)(iva) has its own business deduction conditions and 14% salary limit from FY 2024–25.
2. Tier I and Tier II are different accounts
Tier I is the regulated pension account with restricted access and the contribution deductions described here. Tier II is ordinarily a voluntary, more liquid account. It does not receive the general Tier I contribution or exit concessions. An eligible Central Government employee’s specified Tier II tax saver account is a limited section 80C exception with a three-year lock-in. Do not assume Tier II earnings are exempt or assign every redemption one tax classification or rate without checking the facts.
Investment limits and available equity, corporate debt, government debt and alternative allocations depend on the sector, scheme and election. Current PFRDA options include the Multiple Scheme Framework for non-government subscribers; there is no single universal equity allocation or switching limit. Confirm the applicable choices and permitted changes with the pension provider.
3. What can you withdraw, and what is exempt?
Normal exit. Historically, many subscribers used a 60% lump sum and at least 40% annuity; the November 2025 example below keeps that treatment. For normal non-government exits under the rules amended from 16 December 2025, qualifying routes include age 60, applicable retirement or a qualifying subscription period of at least 15 years (subject to the applicable scheme). For the standard non-government route, at least 20% is ordinarily annuitised, with up to 80% available in cash or approved drawdown options. There are separate options for balances up to ₹8 lakh and for balances over ₹8 lakh up to ₹12 lakh. Government sector, specified public-sector corporate exits and subscribers joining at or after 60 have distinct provisions. Check the category before applying an exit threshold.
Tax on cash and annuity. The general income tax exemption on closure or opting out is limited to 60% of the total amount payable, subject to the statutory conditions. Permission to draw 80% or 100% is not a matching tax exemption. An eligible amount applied directly to annuity purchase in the same year is treated as not received at that point under section 80CCD(5) or the corresponding provision; pension payments received later are taxable. For phased withdrawals, use the applicable PFRDA option and retain the statements showing the eligible exempt portion. Investment returns on amounts left invested are not guaranteed.
Partial withdrawal. The regulatory ceiling is generally 25% of the subscriber’s own contributions, not 25% of the whole corpus. The amended rules generally require at least three years of subscription and permit up to four qualifying withdrawals before the applicable age or retirement milestone, with a four-year gap under that rule. A separate rule applies after the milestone. Check the permitted purpose and the tax wording, including the historical section 10(12B) reference to an employee. Vatsalya has distinct rules and a separate partial withdrawal tax provision.
Premature exit. Under the amended ordinary non-government route, early exit generally requires at least 80% annuitisation; if the corpus is up to ₹5 lakh the regulation permits other options, including a full withdrawal. Do not assume a universal five-year wait or an automatic full tax exemption for a small corpus.
Death before exit. Non-government rules generally allow the nominee or heirs to receive the accumulated balance, with alternative payout options. The historical proviso to section 80CCD(3) excludes the qualifying amount the nominee receives on death from deemed income. Government death benefits and later annuity income require separate analysis.
4. Six worked examples
1. Employer contribution on ₹25 lakh of eligible salary
Siddharth has ₹45 lakh CTC and ₹25 lakh qualifying salary in FY 2025–26. His employer redirects ₹3.50 lakh of an otherwise taxable allowance to an eligible NPS contribution within unchanged compensation. At 14%, the cap is ₹3.50 lakh, versus ₹2.50 lakh at 10%. With assumed employer recognised PF of ₹3 lakh and no other relevant contribution, the aggregate is ₹6.50 lakh, below ₹7.50 lakh. The ₹75,000 standard deduction and ₹3.50 lakh employer contribution deduction total ₹4.25 lakh. If the full difference remains in the 30% slab with 4% cess and no surcharge or other interactions, the NPS tax saving is ₹1,09,200; the incremental saving compared with a ₹2.50 lakh contribution is ₹31,200. CTC alone does not determine the actual tax result.
2. Private sector employee in the old regime
Anjali has ₹12 lakh of qualifying salary and an assumed ₹70,000 eligible EPF contribution. She has ₹80,000 room under section 80CCE, below the ₹1.20 lakh salary-based ceiling. She contributes ₹1.30 lakh to Tier I and claims ₹80,000 under section 80CCD(1) and a separate ₹50,000 under section 80CCD(1B). Her employer contributes ₹1.20 lakh (10%), claimed separately. Total NPS deductions are ₹2.50 lakh; with EPF the total is ₹3.20 lakh. At a constant 31.2% effective marginal rate, the illustrative saving on the full ₹3.20 lakh is ₹99,840. Any claimed HRA and home loan deductions have separate conditions and are not assumed here.
3. Self-employed professional with ₹18 lakh gross total income
Vikram’s 20% salary-independent limit is ₹3.60 lakh, but the unused shared limit is ₹1.50 lakh. If he makes an eligible ₹2 lakh contribution and uses the old regime, ₹1.50 lakh under section 80CCD(1) and ₹50,000 under section 80CCD(1B) can be claimed without counting the same contribution twice.
4. Separate perquisite test for an executive
Kapoor has ₹60 lakh of qualifying salary. Assume employer recognised PF of ₹7.20 lakh (12%) and employer NPS of ₹6 lakh (10%). The NPS contribution fits the salary percentage, but combined contributions are ₹13.20 lakh. The taxable perquisite is ₹5.70 lakh before computing any prescribed accretion. Changing the employer’s PF contribution requires reviewing the applicable scheme, employment terms and any higher-wage arrangement; do not assume payroll can simply substitute a statutory wage ceiling or redirect the balance.
5. November 2025 exit with ₹2 crore of Tier I savings
At age 60, Deshmukh applies ₹80 lakh (40%) to an annuity and uses an eligible systematic withdrawal option for the ₹1.20 crore (60%) portion under the rules for his historical exit. At an assumed 6.8% annual payout, the annuity pays ₹5.44 lakh per year, or approximately ₹45,333 a month if evenly paid. Direct purchase of the annuity is treated separately from taxable annual pension receipts. If he is a resident individual in the FY 2025–26 new regime and this is his only taxable income at normal rates, the section 87A rebate can eliminate the tax. Future annuity tax depends on income and law for each year.
6. NPS Vatsalya for an eight-year-old
The Kulkarnis open an account for their minor daughter and contribute ₹50,000 in a year. Under the revised scheme the opening and annual minimum is ₹250. An eligible contributing parent or guardian may claim their own eligible payment in the old regime within the shared ₹50,000 additional pension limit; the same contribution cannot be claimed twice. At age 18, update KYC and assess continuation, transition to a regular NPS account or the available exit route. The revised rules allow limited specified-purpose withdrawals of up to 25% of own contributions, with up to two before 18 and two more between 18 and 21 subject to conditions. An eligible exit under the revised Vatsalya rules can permit up to 80% in cash and the balance in annuity, or full withdrawal below the applicable small-corpus threshold. Apply the separate tax exemption and any amounts previously deducted; do not treat regulatory permission as a blanket exemption.
5. Frequently asked questions
1. Can I claim all three deductions?
In the old regime, eligible self contributions can fill the shared ₹1.50 lakh and separate ₹50,000 limits without duplication, and actual employer contributions can qualify separately at the applicable percentage. In the default new regime, the self contribution deductions are unavailable; the employer deduction remains.
2. Does rebalancing inside the account work like a mutual fund switch?
Internal Tier I allocation changes that do not pay money out to you should not be treated as a cash exit. Check scheme rules and permitted frequency with the recordkeeper. Keep Tier II withdrawals and externally held investments separate.
3. Can an NRI or OCI open an account?
Eligible Indian citizens including NRIs, and eligible OCIs, may use the All Citizen Model subject to current age, banking, KYC and other requirements. An eligible individual with Indian taxable income should test the relevant statutory deduction and tax regime independently of account eligibility.
4. Does a tax-exempt withdrawal require Form 15G or 15H?
The NPS exemption is determined by the applicable tax provision, not by a withholding declaration. Reconcile the exempt amount and actual payout, and check any taxable portion separately.
5. Does the annuity purchase attract GST?
Entry 36A of Notification 12/2017–Central Tax (Rate) exempts qualifying life insurance services by way of annuity under PFRDA-regulated NPS. This GST treatment does not make later pension receipts income-tax exempt.
6. Where are contribution deductions reported?
Use the separate deduction fields in the applicable ITR utility for own, additional and employer contributions. Reconcile employer amounts to payroll and Form 16 and retain the NPS contribution statement. Use the section numbers and reporting fields for the relevant tax period.
Sources
- Income-tax Act, 1961: sections 10, 17, 36, 80CCD, 80CCE, 87A and 115BAC
- Income-tax Act, 2025: section 124 and Schedules II and III
- PFRDA exit and withdrawal regulations, including 16 December 2025 amendments and historical notes
- PFRDA: All Citizen Model eligibility and investment options
- PFRDA: NPS Vatsalya Scheme Guidelines 2025
- PFRDA: commencement of revised Vatsalya guidelines
- PFRDA: NPS Vatsalya operational and tax guidance
- GST Council: Notification 12/2017–Central Tax (Rate), consolidated entry 36A