Section 80CCD(2): Employer NPS contributions offer tax deduction under new regime

Do you think the new tax regime leaves you with no meaningful deductions? Think again. Even though deductions such as Section 80C, HRA and home loan interest are mostly off the table, Section 80CCD(2) still provides a tax break for your employer's contribution to the National Pension System (NPS). Depending on your salary and your employer's contribution, this benefit could reduce your tax liability by up to Rs 65,500 a year on a particular annual salary.

Let’s break down how this deduction works, who qualifies for it, and what taxpayers need to keep in mind before filing their ITR.

Who can claim a deduction under Section 80CCD(2)?

For salaried individuals who have opted for the National Pension System (NPS) through their employer under the Corporate NPS framework, Section 80CCD(2) offers one of the few tax deductions still available under the new tax regime.

Unlike an employee's own contribution to NPS, which is covered under Sections 80CCD(1) and 80CCD(1B), Section 80CCD(2) applies only to the employer's contribution to an employee's Tier-I NPS account.

“Under the Corporate NPS model, the employer contributes to the employee's NPS account and claims this contribution as a business expense; under Section 80CCD, this amount is not included in the employee's salary income for tax computation. This benefit is available across both the old and new tax regimes, unlike 80CCD and 80CCD(1B), which apply only under the old regime,” says Vikas Seth, CEO, Aditya Birla Sun Life Pension Fund Management Limited.

It is important to note that employees cannot claim this deduction unless their employer has adopted the Corporate NPS model.

How much deduction is available under the old and new tax regimes?

The maximum deduction depends on the tax regime and your employee category under the Income-tax Act, 2025.

Tax Regime

Employee Category

Deduction Limit on Employer Contribution

Old Tax Regime

Central & State Government / Eligible Public Sector employees

14% of Basic Salary + DA

Old Tax Regime

Private employees

10% of Basic Salary + DA

New Tax Regime

All eligible salaried employees

14% of Basic Salary + DA

Source: SBI Pension Funds

This enhanced 14% deduction under the new tax regime has made Corporate NPS particularly attractive for private-sector employees who have switched to the new regime.

Employer contribution vs employee contribution: What's the difference?

The tax treatment of employer and employee contributions is different. According to Adhil Shetty, CEO, BankBazaar, employees opting for the old tax regime can claim:

Up to Rs 1.5 lakh under Section 80CCD(1) within the overall Section 80C limit.

An additional Rs 50,000 under Section 80CCD(1B).

These deductions are not available under the new tax regime.

However, the deduction for the employer's contribution under Section 80CCD(2) continues to be available under both tax regimes, subject to prescribed limits.

You must remember that aggregate employer contributions to NPS, EPF and the superannuation fund exceeding ₹7.5 lakh in a financial year are taxable as a perquisite, Shetty explains.

How much tax can you save?

Employer contributions to NPS under Section 80CCD(2) reduce an employee's taxable income because the contribution is deducted from taxable salary, subject to the prescribed limits.

As the employer contribution increases, taxable income falls, resulting in higher tax savings. Assuming basic salary is 50% of annual salary and the employer contributes the maximum 14% of basic salary under the new tax regime, the tax benefit would look like this:

Annual Salary

Basic Salary

Employer NPS (14%)

Approx. Tax Saved in a Year

₹15 lakh

₹7.5 lakh

₹1.05 lakh

₹16,400

₹20 lakh

₹10 lakh

₹1.40 lakh

₹29,100

₹25 lakh

₹12.5 lakh

₹1.75 lakh

₹46,800

₹30 lakh

₹15 lakh

₹2.10 lakh

₹65,500

Illustrative calculations. Actual tax savings will depend on salary structure, employer contribution and individual tax liability. Source: BankBazaar.

As income levels increase, the eligible employer contribution also rises, enabling employees to allocate a larger amount towards retirement through a tax-efficient route.

While the immediate benefit is reflected in lower taxable income, the larger advantage lies in building a retirement corpus through regular, employer-supported contributions over the course of one’s career. When combined with the power of long-term compounding, these systematic contributions can significantly strengthen an individual’s financial preparedness for retirement.

Who should consider Corporate NPS?

Corporate NPS is particularly beneficial for salaried employees whose employers offer it as part of their compensation package. It is especially beneficial for individuals who have opted for the new tax regime, where conventional deductions are limited.

Employer contributions to NPS offer a dual advantage. “Unlike many salary restructuring components that primarily influence take-home pay, employer contributions to NPS offer the dual advantage of lowering taxable income and building long-term retirement savings,” says Vishwajeet Goel, Head of Pensionbazaar.

The scheme can also be useful for employees restructuring their cost-to-company (CTC). “Converting a taxable allowance into an employer NPS contribution can reduce tax liability without increasing the overall CTC,” says Seth.

Apart from the tax benefits, Corporate NPS offers long-term flexibility. Employees can continue using the same NPS account even after changing employers, as the accumulated corpus remains portable across organisations under the PFRDA-regulated framework.

Corporate NPS also encourages disciplined retirement planning because contributions are made through payroll.

“Payroll-based contributions help overcome this behavioural hurdle by making retirement investing automatic rather than optional. Regular investing also enables employees to benefit from rupee cost averaging across market cycles,” says Pranay Ranjan Dwivedi, MD & CEO, SBI Pension Funds.

How can you claim the tax deduction while filing your ITR?

Employees should first verify that the employer's contribution to their Tier-I NPS account is correctly reflected in Form 16 and salary records.

“While filing the income tax return, the corresponding deduction can then be claimed under Section 80CCD(2), subject to the applicable limits. It is advisable to reconcile the figures with Form 16 before submitting the return to avoid any mismatch,” says Goel.

Taxpayers should also remember that while self-contributions to NPS are not deductible under the new tax regime, the employer's contribution continues to remain an important tax benefit that should not be overlooked, he adds.

If your employer offers Corporate NPS and you haven't opted for it, you could be leaving one of the few real deductions left under the new tax regime.