Corporate NPS: The tax hack that’s available even under the new regime

NPS' multiple tax benefits

Post the Budget 2025 announcements that made the new tax regime far friendlier, chartered accountants say corporate NPS has started gaining traction as employees look to maximise the few tax breaks that the minimal-exemptions framework offers.

Now, the employer’s contribution to the employee’s National Pension System (NPS) account is eligible for tax breaks under the old as well as new tax regimes under section 80 CCD (2). Budget 2024 raised the tax benefit on employer’s contribution to 14 percent of the employee’s basic pay and dearness allowance, if any. However, tax sops under the old regime continue to be restricted to 10 percent (14 percent for government employees).

Here’s how you can aim for higher tax savings if your employer contributes to your NPS:

The old tax regime allows deduction on own NPS contributions of up to 14 percent (10 percent under the old regime) of your basic salary plus dearness allowance will qualify for deductions under section 80 CCD (1). This is subject to the overall section 80 C limit of Rs 1.5 lakh.

Another sub-section under the old regime, 80 CCD (1B), allows you to avail of an additional tax benefit of Rs 50,000. However, the new tax regime does not offer these deductions – only the tax break on employers’ contribution of up to 14 percent of employees’ basic salary and dearness allowance, if any, is available.

Even though section 80 CCD (2), which allows tax deductions on the employer’s contributions to the employee’s NPS, can help slash your tax outgo substantially, the scheme remains under-utilised due to lack of awareness. For example, as per Taxmann's calculations, the tax-free limit under the new tax regime, which offers tax rebate on incomes up to Rs 12 lakh, can go up to Rs 13.5 lakh if employees sign up for corporate NPS.

Indian employees — resident Indians, non-resident Indians (NRIs), and overseas citizens of India (OCI) — aged 18-70 can register as NPS subscribers under the corporate scheme through their employers. If you are already registered as an NPS subscriber, you can share your permanent retirement account number (PRAN) with your employer to route the contributions through this facility.

Also Read: Most employees without HRA claims prefer new tax regime, corporate NPS gaining traction, say CAs

Neither you nor your employer need to choose between the employees’ provident fund (EPF) and NPS. You can contribute to both.

Government employees, however, now have to choose between NPS and UPS (Unified Pension Scheme), which was announced in 2024. They have to take this call by June 30, 2025. Until UPS appeared on the scene, NPS was mandatory for all central government employees, except the armed forces, who joined after January 1, 2004.

Private sector employees can transfer their NPS account tagged to a PRAN to another employer when they switch jobs, provided the new employer is willing to contribute to their NPS. Depending on your employer’s policy, NPS investment management charges, custodian fees, transaction charges, and so on will have to be borne either by you or the employer.

Besides employees, employers also qualify for tax benefits on account of contributions to their employees’ NPS.

Employers’ contribution of up to 10 percent of their employees’ basic salary is treated as a business expense and can be deducted from the profit and loss account under section 36 (1) (iv) (a) of the Income Tax Act.

Organisations registered under the Companies Act, 2013, or registered co-operative societies are allowed to contribute to their employees’ NPS. Government and affiliated organisations, too, can adopt the corporate model, besides public sector enterprises. Registered partnership firms, proprietary concerns, and certain foreign companies (for specific Indian employees) are also eligible.

Also read: NPS Vatsalya: Why children’s pension cannot be priority over education or parents' retirement plans

Withdrawal rules are the same for own as well as employers’ contributions. At age 60, you can withdraw 60 percent of the corpus as a lumpsum. The balance has to be used to purchase annuities, which will be used to pay your pension post-retirement.

You can make partial withdrawals of up to 25 percent of your own contributions after three years for certain critical illnesses, purchase of property, children’s education, and so on.