NPS Tax Benefits 2026-27: Old 80CCD Under the New Act

NPS gives three separate tax deductions, and in FY 2026-27 (tax year 2026-27) only one of them works in the new regime: your employer's contribution of up to 14% of basic pay plus DA. Your own contribution within the ₹1.5 lakh limit and the extra ₹50,000 for NPS are available only in the old regime. From 1 April 2026 these provisions, familiar as Section 80CCD(1), 80CCD(1B) and 80CCD(2), sit in Section 124 of the Income-tax Act, 2025, with the ₹1.5 lakh ceiling in Section 123 (old 80C).

This guide covers the tax side of contributing. For the exit and withdrawal rules, see NPS exit rules and annuity options.

The three NPS deductions at a glance (FY 2026-27)

Notes, as of October 2026:

• The subsection numbering inside Section 124 is still being settled in commentary; your employer's Form 130 (old Form 16) and the ITR utility label each item, so follow those labels when filing.
• The deductions apply to contributions to the Tier I account. Tier II contributions generally get no deduction.
• The old regime still has the ₹50,000 standard deduction; the new regime has ₹75,000. Slabs are covered in income tax slabs for FY 2026-27.

Deduction 1: your own contribution (old 80CCD(1))

If you contribute to NPS yourself, the amount counts towards the same ₹1.5 lakh ceiling as PPF, ELSS, EPF and life insurance under Section 123 (old 80C). The NPS part of that ceiling is limited to 10% of your salary (basic plus DA) if you are salaried, or 20% of gross total income if self-employed.

For most salaried people, EPF and other investments already fill the ₹1.5 lakh, so this slot adds little. Our guide to tax saving options under 80C shows how the limit is usually used.

Deduction 2: the extra ₹50,000 (old 80CCD(1B))

This is the deduction most people mean by "NPS tax benefit": an additional ₹50,000 for your own Tier I contribution, over and above the ₹1.5 lakh limit. It is available only in the old regime.

Tax saved on ₹50,000, including 4% cess:

Budget 2025 extended a ₹50,000 old-regime deduction to parents' contributions to a child's NPS Vatsalya account. Treat the ₹50,000 as a combined figure unless your tax adviser confirms otherwise for your case.

Deduction 3: the employer's contribution (old 80CCD(2))

If your employer contributes to your NPS account as part of your salary package, that amount is deductible:

• New regime: up to 14% of basic plus DA, for all employees.
• Old regime: up to 10% for private-sector employees and 14% for government employees.

This is outside the ₹1.5 lakh and ₹50,000 limits, which makes it the most powerful NPS benefit for higher earners, and the main retirement deduction left in the new regime.

There is one ceiling to watch: the combined employer contributions to EPF, NPS and approved superannuation above ₹7.5 lakh a year are taxable as a perquisite in your hands, along with the income earned on the excess, as under the old Section 17(2) rules carried into the new Act.

The catch is that your employer must offer corporate NPS. If it does, you can usually ask HR to restructure part of your CTC as an employer NPS contribution. Your gross pay falls by the same amount, so your in-hand salary drops; the benefit is the tax saved plus the retirement savings.

Worked example: ₹15 lakh salary, both regimes (illustrative)

Rahul earns ₹15 lakh a year; his basic pay is ₹6 lakh. He is considering a corporate NPS contribution of 14% of basic, which is ₹84,000.

New regime

Tax on ₹14.25 lakh: ₹20,000 (4-8 lakh at 5%) + ₹40,000 (8-12 lakh at 10%) + ₹33,750 (₹2.25 lakh at 15%) = ₹93,750, plus 4% cess = ₹97,500. On ₹13.41 lakh the last part is ₹1.41 lakh × 15% = ₹21,150, giving ₹81,150 + cess = ₹84,396. Saving: ₹13,104 a year, and ₹84,000 goes into his retirement account.

Old regime

Assume Rahul claims the ₹50,000 standard deduction, ₹1.5 lakh under Section 123 and ₹25,000 for health insurance (Section 126, old 80D). His taxable income is ₹12,75,000, which is in the 30% slab.

• Adding the extra ₹50,000 own NPS contribution saves ₹15,600.
• An employer contribution at the old-regime cap of 10% of basic (₹60,000) saves a further ₹18,720 (₹60,000 × 31.2%).

Whether the old regime is better overall depends on his other deductions; use our income tax calculator and the comparison in new vs old tax regime before deciding.

How NPS is taxed when you take money out

Contributions are only half the picture. As of October 2026:

So NPS is not fully tax-free like PPF. It works best for people who get a deduction at a high slab while working and expect a lower slab in retirement.

Common mistakes

1. Claiming 80CCD(1B) in the new regime. It is not allowed; the ITR will reject it or you may get a notice.
2. Contributing to Tier II for tax. Tier II gives no deduction for most taxpayers.
3. Ignoring the annuity rule. At least 20% of the corpus above ₹12 lakh must buy an annuity for non-government subscribers, and that income is taxable.
4. Counting employer NPS twice. It reduces taxable salary under Section 124; it is not also part of your ₹1.5 lakh.
5. Not submitting proof to your employer. Your own contributions made outside payroll should be declared to HR so TDS is correct, or claimed when filing your return.
6. Missing the ₹7.5 lakh perquisite cap on combined employer EPF and NPS contributions at high salaries.

Key takeaways

• NPS deductions formerly under Section 80CCD now sit in Section 124 of the Income-tax Act, 2025, with the ₹1.5 lakh ceiling in Section 123 (old 80C).
• Own contributions (including the extra ₹50,000) are deductible only in the old regime, as of FY 2026-27.
• Employer NPS up to 14% of basic plus DA is deductible in the new regime; it saved ₹13,104 in the illustrative ₹15 lakh example.
• The extra ₹50,000 saves up to ₹15,600 a year in the old regime's 30% slab.
• At exit, 60% of the corpus is tax-free; annuity income is taxable.
• Combined employer retirement contributions above ₹7.5 lakh a year are taxable.