NPS Tax Benefits 2026: Old vs New Tax Regime

What Is NPS and How Does It Work?

The National Pension System (NPS) is a regulated, market-linked retirement savings scheme designed to help individuals build a pension corpus during their working years.

Subscribers make regular or periodic contributions to their NPS accounts. These contributions are invested through registered pension funds in asset classes such as equity, corporate debt, government securities and alternative investments, depending on the investment option selected by the subscriber.

At retirement or exit, the accumulated corpus may be partly withdrawn as a lump sum, while the prescribed portion may have to be used to purchase an annuity, subject to the applicable NPS exit rules.

Unlike a traditional defined-benefit pension, NPS does not promise a fixed pension. The eventual retirement corpus and pension depend mainly on:

The amount and frequency of contributions;
The investment returns earned;
The period for which the money remains invested;
Applicable charges; and
The portion of the corpus used to purchase an annuity.

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013.

Important 2026 update: For FY 2025–26 and AY 2026–27, NPS deductions continue to be discussed with reference to Section 80CCD of the Income-tax Act, 1961. For tax years beginning on or after 1 April 2026, the corresponding provisions of the Income-tax Act, 2025—including Section 124 and the relevant Schedules—apply. This article mentions both references to help readers understand the transition.

Key Features of NPS

Regulated: NPS is regulated by PFRDA.
Open to eligible citizens: Resident Indians, NRIs and OCIs meeting the applicable conditions may open a Tier-I account.
Low cost: Its fund-management and administrative charges are comparatively low.
Flexible: Subscribers can select their pension fund, investment option and asset allocation, subject to NPS rules.
Portable: The account generally continues despite a change in employment, employer or location.
Market-linked: Returns depend on the performance of the selected investments and are not guaranteed.
Transparent: Subscribers can monitor their accounts online using their Permanent Retirement Account Number (PRAN).
Tax efficient: Eligible contributions and specified withdrawals receive tax treatment under the Income-tax law.

Who Can Open an NPS Account?

An NPS Tier-I account may generally be opened by:

An Indian citizen, whether resident or non-resident;
An Overseas Citizen of India, subject to the applicable conditions;
A person between 18 and 70 years of age; and
A person complying with the prescribed KYC requirements.

HUFs and Persons of Indian Origin who do not qualify as Indian citizens or OCIs are not eligible.

NPS is an individual pension account. It cannot ordinarily be opened by one adult on behalf of another adult. A separate NPS Vatsalya arrangement is available for eligible minor children.

NPS Through an Employer

An employer may offer NPS as part of its employee retirement-benefit structure. Depending on the arrangement, contributions may be made by:

The employee;
The employer; or
Both the employee and employer.

Employer-sponsored NPS is particularly important for tax planning because the deduction for an eligible employer contribution is available separately from the deduction for the employee’s personal investment.

NPS Tier-I vs Tier-II

Particulars	NPS Tier-I	NPS Tier-II
Nature	Primary retirement/pension account	Optional investment account
Basic requirement	Can be opened independently by an eligible subscriber	Requires an active Tier-I account
Withdrawals	Governed by NPS exit and partial-withdrawal rules	Generally unrestricted
Tax deduction on contribution	Available subject to the tax regime and applicable limits	Generally not available
Tax treatment of returns	Governed by applicable NPS tax provisions	No general NPS-specific exemption
NRI/OCI eligibility	Permitted subject to conditions	NRIs and OCIs are not permitted to activate Tier-II
Investment choice	Pension fund and investment pattern may be selected	Separate pension fund and investment pattern may generally be selected
Primary purpose	Long-term retirement accumulation	Flexible investment

The PFRDA All Citizen Model guidance states that ordinary Tier-II contributions and returns do not receive NPS tax benefits. A limited Tier-II Tax Saver Scheme exists for eligible Central Government employees, subject to separate conditions and a three-year lock-in.

NPS Tax Benefits Under the Old Tax Regime

Under the old tax regime, an individual’s own contribution to an eligible NPS Tier-I account may qualify for deduction as follows:

A. Employee’s own contribution—Section 80CCD(1)

A salaried employee may claim the lower of:

The actual eligible contribution;
10% of eligible salary; or
The amount available within the combined ₹1.50 lakh ceiling under Sections 80C, 80CCC and 80CCD(1).

For this purpose, salary generally includes basic salary and eligible dearness allowance. It does not mean the employee’s entire cost-to-company.

A self-employed individual may claim the lower of:

The actual eligible contribution;
20% of gross total income; or
The amount available within the combined ₹1.50 lakh ceiling.

B. Additional ₹50,000 deduction—Section 80CCD(1B)

An individual may claim an additional deduction of up to ₹50,000 for an eligible contribution to NPS.

This deduction is over and above the combined ₹1.50 lakh limit. Therefore, an individual’s own NPS contribution may provide a total deduction of up to ₹2 lakh, subject to the applicable conditions:

Up to ₹1.50 lakh within the combined limit; and
An additional deduction of up to ₹50,000.

However, the same contribution cannot be claimed twice under Sections 80CCD(1) and 80CCD(1B).

The additional deduction is no longer appropriately described as being available “only through NPS,” because the notified provisions also cover eligible APY and NPS Vatsalya contributions in specified circumstances.

C. Employer contribution—Section 80CCD(2)

An eligible contribution made by the employer to the employee’s NPS account is deductible separately and does not form part of the combined ₹1.50 lakh ceiling.

The maximum percentage depends on the employee category and the tax regime:

Employee category and tax regime	Maximum deduction for employer contribution
Central or State Government employee	Up to 14% of eligible salary
Private-sector employee—old tax regime	Up to 10% of eligible salary
Private-sector employee—new tax regime	Up to 14% of eligible salary

Accordingly, an eligible private-sector employer contribution is deductible up to 10% of specified salary under the old tax regime and up to 14% under the new tax regime. For eligible Central and State Government employees, the deduction may extend to 14% of specified salary.

NPS Tax Benefits: Old vs New Regime

NPS benefit	Old tax regime	New tax regime
Own contribution within ₹1.50 lakh combined limit	Available	Not available
Additional own-contribution deduction up to ₹50,000	Available	Not available
Employer’s NPS contribution	Available	Available
Private employer contribution limit	Up to 10% of eligible salary	Up to 14% of eligible salary
Government employer contribution limit	Up to 14% of eligible salary	Up to 14% of eligible salary
Maximum personal NPS deduction without employer contribution	Potentially up to ₹2 lakh	Nil

The key practical conclusion is:

Under the old regime, both personal NPS contributions and eligible employer contributions can provide deductions. Under the new regime, personal contributions do not ordinarily provide a deduction, but the eligible employer contribution continues to qualify.

The Income Tax Department also confirms that Section 80CCD(2) is one of the limited Chapter VI-A deductions permitted under the new regime.

Old vs New Regime: Practical Illustration

Suppose a private-sector employee has:

Basic salary plus eligible DA: ₹10,00,000;
Personal NPS contribution: ₹1,20,000;
Other qualifying Section 80C investments: ₹80,000; and
Employer NPS contribution: ₹1,40,000.

Under the old tax regime

Only ₹70,000 of the personal NPS contribution can be accommodated within the remaining ₹1.50 lakh combined ceiling.
A further amount of up to ₹50,000 may be claimed as the additional NPS deduction.
Employer contribution deduction is restricted to ₹1,00,000, being 10% of eligible salary.

Potential total deduction: ₹2,20,000.

Under the new tax regime

No deduction is ordinarily available for the employee’s personal ₹1,20,000 contribution.
Employer contribution may qualify up to ₹1,40,000, being 14% of eligible salary.

Potential NPS deduction: ₹1,40,000.

This example demonstrates why the most tax-efficient NPS route under the new regime is generally an eligible employer contribution, not merely depositing money personally into NPS.

NPS Withdrawal and Exit Rules: Tax Treatment in 2026

The National Pension System (NPS) is primarily a long-term retirement product. Withdrawals are permitted, but the rules differ for a partial withdrawal, a Tier-II withdrawal, a normal exit and a premature exit.

The PFRDA withdrawal rules and income-tax provisions must be examined separately. Permission to withdraw an amount under PFRDA rules does not automatically make the entire amount tax-free.

Partial Withdrawal from an NPS Tier-I Account

A subscriber becomes eligible to apply for a partial withdrawal after completing three years from the date of subscription.

Permitted purposes

Partial withdrawal is allowed for specified purposes, including:

Higher education of the subscriber’s children, including a legally adopted child;
Marriage of the subscriber’s children, including a legally adopted child;
Purchase or construction of a residential house or flat in the subscriber’s individual or joint name with the spouse, subject to prescribed conditions;
Treatment of specified illnesses affecting the subscriber, spouse, children or dependent parents;
Medical and incidental expenses arising from the subscriber’s disability or incapacitation;
Setting up a new venture or start-up; and
Skill development, reskilling or other self-development activities.

Maximum amount and frequency

For the first partial withdrawal, a subscriber may withdraw up to 25% of his or her own contributions. Appreciation or investment returns are excluded when calculating this limit.

For a subsequent withdrawal, the limit is generally calculated with reference to the subscriber’s incremental own contributions made after the previous withdrawal. Any unused portion of an earlier eligible limit may remain available according to the applicable rules.

Under the PFRDA Exit and Withdrawal FAQs:

Before attaining 60 years, up to four partial withdrawals are permitted, with a minimum interval of four years between withdrawals.
After attaining 60 years, partial withdrawals may be made until age 85, with a minimum interval of three years between withdrawals.

Employer contributions and investment returns are not included in the 25% limit.

Tax treatment

Under the applicable income-tax provision, an eligible partial withdrawal by an employee-subscriber is exempt up to 25% of the contributions made by the employee, provided the prescribed conditions are satisfied.

The statutory exemption uses the expression “employee”. A self-employed or other non-employee subscriber should therefore not automatically assume that the same exemption applies. The position should be checked under the law applicable in the year of withdrawal.

Withdrawal from an NPS Tier-II Account

Tier-II is an optional investment account available to a subscriber with an active Tier-I account. An ordinary Tier-II account generally permits unrestricted withdrawals.

Ordinary Tier-II contributions do not receive the special NPS deductions available for eligible Tier-I contributions. The tax law also provides no general NPS-specific exemption for an ordinary Tier-II withdrawal.

The tax treatment of income or gains from Tier-II investments must therefore be examined under the normal income-tax provisions applicable to the investment and transaction. A uniform statement that every Tier-II withdrawal is automatically taxable as capital gains should be avoided unless supported by the facts and applicable law.

Special Tier-II Tax Saver Scheme

A separate Tier-II Tax Saver Scheme is available to eligible Central Government employees. It carries a three-year lock-in and is subject to separate conditions. It should not be confused with an ordinary Tier-II account.

Normal Exit from NPS

Normal exit refers to an exit after the subscriber becomes eligible under the applicable NPS regulations. The options differ according to the subscriber’s sector, accumulated pension wealth and scheme.

Recent PFRDA changes permit options such as lump-sum withdrawal, annuity purchase, Systematic Lump Sum Withdrawal (SLW), Systematic Unit Redemption (SUR) and other approved payout methods in specified cases.

For certain non-government subscribers, the broad position is:

Accumulated pension wealth	Broad exit option
Up to ₹8 lakh	The entire amount may be withdrawn as a lump sum or through permitted periodic payout options.
More than ₹8 lakh but not more than ₹12 lakh	Up to ₹6 lakh may be withdrawn as a lump sum or through an approved periodic method; the balance must be applied through the permitted annuity, SUR or other approved options.
More than ₹12 lakh	The applicable scheme rules determine the permitted lump sum, minimum annuity and periodic payout choices.

These exit options arise under the applicable PFRDA regulations. The precise treatment depends on the subscriber’s sector, scheme and circumstances of exit. Further, permission to withdraw an amount under PFRDA regulations does not necessarily mean that the entire amount is exempt under the income-tax law.

Tax Treatment at Normal Exit

A payment from the NPS Trust on closure of the account or opting out is exempt up to 60% of the total amount payable at that time, subject to the statutory conditions. This exemption is available under both the old and new tax regimes.

Therefore:

A permitted lump-sum withdrawal within the 60% statutory limit may qualify for exemption.
If PFRDA rules permit withdrawal of more than 60%, the additional portion should not automatically be described as tax-free.
The tax treatment of periodic withdrawals through SLW or SUR should be examined with reference to the applicable income-tax provision and the manner in which the exit is exercised.

Purchase of Annuity and Taxability of Pension

The amount applied to purchase an annuity in accordance with NPS rules is not treated as income merely because it is transferred to an Annuity Service Provider.

However, pension or annuity payments subsequently received are taxable in the recipient’s hands in the year of receipt at the applicable slab rate. NPS therefore provides a concession at the annuity-purchase stage, but the pension income itself is not tax-free.

Premature Exit from NPS

Premature exit occurs when a subscriber closes the Tier-I account before becoming eligible for normal exit.

A subscriber is not required to complete 15 years merely to request a premature exit. Fifteen years is relevant to the vesting condition for normal exit under the common All Citizen scheme. A subscriber may opt for premature exit before completing that period, subject to more restrictive conditions.

Where accumulated pension wealth exceeds ₹5 lakh, at least 80% must generally be used to purchase an annuity. Where it is ₹5 lakh or less, the subscriber may generally withdraw the entire amount as a lump sum or choose an eligible periodic payout option.

Accumulated pension wealth	Maximum generally available without compulsory annuity	Minimum annuity
₹5 lakh or less	Up to 100%	Nil
More than ₹5 lakh	Up to 20%	At least 80%

These are regulatory conditions. The income-tax treatment of the amount received must be determined separately.

Death of an NPS Subscriber

Exit options following death vary according to the subscriber’s sector, scheme and accumulated pension wealth. The PFRDA death-exit rules should therefore be presented separately for government and non-government subscribers.

Under the income-tax provisions, the amount received by the nominee on the subscriber’s death is exempt, subject to the applicable statutory provision. Annuity payments received later may remain taxable under the normal rules.

Practical Takeaway

Every NPS withdrawal raises two separate questions:

How much may be withdrawn under PFRDA regulations?
How much of that withdrawal is exempt under income-tax law?

Subscribers should not assume that the entire amount permitted under pension regulations is necessarily tax-free. Before choosing a normal exit, premature exit, SLW or SUR, both the current PFRDA rules and the income-tax provisions applicable to the relevant year should be checked.

Conclusion

The National Pension System can serve two purposes simultaneously: building a long-term retirement corpus and providing eligible tax benefits. However, its tax advantage depends significantly on whether the subscriber chooses the old or new tax regime and whether the contribution is made personally or by the employer.

Under the old tax regime, an eligible personal contribution to an NPS Tier-I account may qualify within the combined ₹1.50 lakh deduction limit, together with an additional deduction of up to ₹50,000. An eligible employer contribution is deductible separately.

Under the new tax regime, deductions for personal NPS contributions are generally unavailable. However, an eligible employer contribution to the employee’s Tier-I account continues to qualify, subject to the prescribed percentage of salary. This makes employer-sponsored NPS one of the limited tax-saving opportunities available under the new regime.

Subscribers must also distinguish between PFRDA withdrawal rules and income-tax provisions. An amount permitted to be withdrawn under NPS regulations is not necessarily exempt in full. Although an eligible lump-sum payment on closure or exit may be exempt up to the statutory limit, pension or annuity income received subsequently is generally taxable at the recipient’s applicable slab rate.

NPS should therefore not be selected merely to obtain an immediate tax deduction. Before investing, subscribers should also consider the long lock-in, market-linked returns, asset allocation, annuity requirement, liquidity needs and expected post-retirement taxation.

A well-planned NPS contribution—particularly when supported by an employer—can form an important part of retirement planning. Nevertheless, the decision between the old and new tax regimes should be based on a comparison of all available deductions, exemptions and applicable tax rates, rather than on the NPS deduction alone.

Frequently Asked Questions

1. Is an NPS contribution eligible for deduction under both the old and new tax regimes?

An eligible personal contribution to an NPS Tier-I account may qualify for a deduction under the old tax regime, subject to applicable limits and conditions. Such a personal contribution deduction is generally unavailable under the new tax regime.

However, an eligible contribution made by an employer to an employee’s Tier-I NPS account may qualify under both regimes, subject to the applicable conditions and percentage limits.

2. Can I claim both the ₹1.50 lakh deduction and the additional ₹50,000 NPS deduction?

Yes. Under the old tax regime, an eligible personal NPS contribution may be claimed within the combined ₹1.50 lakh ceiling applicable to specified investments and payments. An additional deduction of up to ₹50,000 may also be claimed for an eligible NPS contribution.

However, the same contribution cannot be claimed twice. The portion claimed within the ₹1.50 lakh limit cannot again be used to claim the additional ₹50,000 deduction.

3. What is the maximum deduction available for an individual’s own NPS contribution?

Under the old tax regime, the total deduction for an individual’s own eligible NPS contribution can potentially reach ₹2 lakh:

Up to ₹1.50 lakh within the combined deduction ceiling; and
An additional deduction of up to ₹50,000.

The deduction within the ₹1.50 lakh ceiling remains subject to the applicable salary or gross-total-income limit. Employer contributions are considered separately.

4. Is the employer’s NPS contribution included in the ₹1.50 lakh limit?

No. An eligible employer contribution is deductible separately and is not included in the combined ₹1.50 lakh ceiling applicable to specified personal investments and payments.

For a private-sector employee, the eligible limit is generally up to 10% of specified salary under the old tax regime and up to 14% under the new tax regime. For eligible Central and State Government employees, the limit may extend to 14% of specified salary.

For this purpose, salary generally means basic salary plus eligible dearness allowance and does not ordinarily mean the employee’s complete cost-to-company.

5. Can a self-employed person claim an NPS deduction?

Yes. Under the old tax regime, a self-employed individual may claim a deduction for an eligible personal contribution to a Tier-I NPS account, subject to the prescribed percentage of gross total income and the combined ₹1.50 lakh ceiling.

The individual may also claim the additional NPS deduction of up to ₹50,000, subject to the applicable conditions. These personal-contribution deductions are generally unavailable under the new tax regime.

6. Is an NPS Tier-II contribution eligible for a tax deduction?

An ordinary Tier-II contribution generally does not qualify for the tax deductions available to eligible Tier-I contributions.

A separate Tier-II Tax Saver Scheme is available to eligible Central Government employees, subject to a three-year lock-in and other prescribed conditions. It should not be confused with an ordinary Tier-II investment account.

7. Is a partial withdrawal from NPS tax-free?

An eligible partial withdrawal may be exempt up to 25% of the employee-subscriber’s own contributions, provided the withdrawal satisfies the prescribed NPS and income-tax conditions.

Employer contributions and investment returns are not included when calculating the 25% partial-withdrawal limit. Since the statutory exemption specifically uses the expression “employee”, a self-employed or non-employee subscriber should verify the applicable tax treatment before withdrawing.

8. Is the entire NPS corpus tax-free on retirement?

Not necessarily. The income-tax law generally exempts an eligible payment from the NPS Trust on closure or opting out only up to 60% of the total amount payable, subject to the statutory conditions.

PFRDA regulations may permit different withdrawal or payout options depending upon the subscriber’s sector and accumulated pension wealth. Permission to withdraw a particular amount under those regulations does not automatically make the entire amount tax-free.

9. Is the amount used to purchase an annuity taxable?

The amount applied to purchase an annuity in accordance with the prescribed NPS conditions is not treated as taxable income merely because it is transferred to an Annuity Service Provider.

However, the pension or annuity payments subsequently received are generally taxable in the recipient’s hands at the applicable slab rate in the year of receipt.

Disclaimer

This article is intended for general educational purposes and does not constitute personalised tax, investment or retirement advice. NPS regulations and income-tax provisions may change. Subscribers should verify the latest PFRDA rules and applicable income-tax provisions or consult a qualified professional before making a contribution, withdrawal or exit decision.