NPS Tax Benefits: 80CCD(1), 80CCD(1B) and the Employer Deduction That Survives

The three deductions

• 80CCD(1): your own contribution, up to ten per cent of salary for employees or twenty per cent of gross total income for the self-employed. It sits inside the one lakh fifty thousand rupee ceiling.
• 80CCD(1B): an additional fifty thousand rupees for your own contribution, over and above that ceiling.
• 80CCD(2): your employer's contribution, deductible up to fourteen per cent of basic plus DA in the new regime and ten per cent in the old.

Why 80CCD(2) matters most

It is the only NPS deduction available in the new regime. Employer contributions are added to your salary and then deducted, so the net tax effect is nil within the limit.

For an employee on the new regime with basic of eight lakh rupees, an employer NPS contribution of fourteen per cent is one lakh twelve thousand of effectively untaxed compensation. Restructuring part of a package into employer NPS is one of the few planning levers the new regime leaves open.

Withdrawal rules

At sixty, up to sixty per cent of the corpus may be withdrawn tax-free, and at least forty per cent must be used to purchase an annuity. The annuity income is taxable as it is received.

Partial withdrawals are permitted after three years for specified purposes — higher education, marriage, medical treatment, home purchase — up to twenty-five per cent of your own contributions.

The trade-off

NPS is illiquid until sixty, and the mandatory annuitisation of forty per cent means that portion produces taxable income rather than a lump sum. Against that, the charges are among the lowest of any retirement product in India.

The deduction should not by itself decide the allocation. A fifty thousand rupee deduction at a thirty per cent marginal rate saves fifteen thousand rupees; locking money until sixty is a separate decision.

Frequently asked questions

### Is the extra ₹50,000 NPS deduction available in the new regime?

No. Section 80CCD(1B) is unavailable in the new regime. Only 80CCD(2), covering employer contributions up to fourteen per cent of basic, survives there.

### Does employer NPS contribution count as my income?

It is added to your salary and then deducted under 80CCD(2) within the limit, so the net effect is nil. Contributions exceeding the limit remain taxable in your hands.

### What is the combined NPS deduction in the old regime?

Up to one lakh fifty thousand under 80C including 80CCD(1), plus fifty thousand under 80CCD(1B), plus employer contribution up to ten per cent of basic under 80CCD(2) — which is outside both other limits.