Published 26 October 2026
The National Pension System carries three separate deductions, and they behave differently. One sits inside the Rs 1.5 lakh shared with section 80C. One is an extra Rs 50,000 on top. The third, for the employer’s contribution, has its own percentage cap and is the only one that survives the new tax regime. Its cap also depends on who the employer is and which regime the employee is in. This guide takes the three in turn, under both Acts, with the 2024 and 2025 amendments.
Which Act governs which year
Financial year 2025-26 (assessment year 2026-27) and earlier. The Income-tax Act, 1961 applies, through section 80CCD and the aggregate cap in section 80CCE.
Tax year 2026-27 onwards. The Income-tax Act, 2025 applies. The provisions are split:
| Deduction | 1961 Act | 2025 Act |
|---|---|---|
| Own contribution, within the Rs 1,50,000 | s.80CCD(1), capped by s.80CCE | Schedule XV, para 1(y), capped by s.123 |
| Additional own contribution, Rs 50,000 | s.80CCD(1B) | s.124(3) |
| Contribution to a minor’s account (NPS Vatsalya) | second proviso to s.80CCD(1B) | s.124(4) |
| Employer’s contribution | s.80CCD(2) and its proviso | s.124(1) and (2) |
| Tax on withdrawal | s.80CCD(3) to (5) | s.124(6) to (9) |
Earlier years stay under the 1961 Act by section 536(2) of the 2025 Act.
Section 80CCD(1): own contribution, inside the Rs 1.5 lakh
Section 80CCD(1) allows an individual a deduction for the amount “paid or deposited in his account under a pension scheme notified or as may be notified by the Central Government”, up to:
- 10 per cent of salary, for an employee, whether of the Central Government or any other employer; and
- 20 per cent of gross total income, “in any other case”, for example a self-employed individual.
“Salary” here “includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites” (Explanation to section 80CCD).
This deduction counts towards the Rs 1,50,000. Section 80CCE caps section 80C, section 80CCC and section 80CCD(1) together. Under the 2025 Act the own contribution is paragraph 1(y) of Schedule XV, with the same 10 and 20 per cent limits, and so falls inside the Rs 1,50,000 in section 123. Section 80C: What Qualifies and What to Keep covers the rest of that cap.
Section 80CCD(1B): Rs 50,000 more
Section 80CCD(1B) allows a further deduction for the individual’s own contribution, “whether or not any deduction is allowed under sub-section (1)”, which “shall not exceed fifty thousand rupees”. It is outside section 80CCE, so it is in addition to the Rs 1,50,000. The proviso prevents the same rupee being claimed twice: no deduction under (1B) is allowed for an amount already allowed under (1). Section 124(3) of the 2025 Act gives the same Rs 50,000, and section 124(5) carries the anti-duplication rule.
In practice the two are claimed in sequence. Where an employee pays Rs 80,000 into the NPS and has already used Rs 1,20,000 of the Rs 1,50,000 on other items, Rs 30,000 can go under section 80CCD(1) and Rs 50,000 under (1B). Which rupee goes where is the taxpayer’s allocation in the return.
NPS Vatsalya: a parent’s contribution for a minor
The Finance Act, 2025 inserted a second proviso to section 80CCD(1B), with effect from 1 April 2026. It allows the deduction “where any payment or deposit is made to the account of a minor under the pension scheme”, by the parent or guardian, “subject to the condition that the aggregate amount of deduction under this sub-section shall not exceed fifty thousand rupees”. The first assessment year it governs is AY 2026-27 (FY 2025-26). Section 124(4) of the 2025 Act is the same.
Two points follow from the words:
- It is a section 80CCD(1B) deduction, not a section 80C one. A parent’s own (1B) contribution and the minor’s account share one Rs 50,000 between them.
- Money returned on closure because the minor dies is not income of the parent, guardian or nominee: the second proviso to section 80CCD(3), and section 124(8) of the 2025 Act.
Section 80CCD(2): the employer’s contribution
The employer’s contribution is first included in the employee’s salary: section 17(1)(viii) of the 1961 Act and section 16(k) of the 2025 Act. Section 80CCD(2) then allows it as a deduction, up to a percentage of the employee’s salary:
| Employer | Old regime | New regime |
|---|---|---|
| Central Government or a State Government | 14 per cent | 14 per cent |
| Any other employer | 10 per cent | 14 per cent |
The 14 per cent for a private employer under the new regime comes from the proviso to section 80CCD(2), inserted by section 25 of the Finance (No. 2) Act, 2024 “with effect from the 1st day of April, 2025”. It applies “where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC”, so it first governs AY 2025-26 (FY 2024-25). Section 124(2) of the 2025 Act carries it: where total income is taxed under section 202(1), “14%” replaces “10%”. A Government employer’s 14 per cent applies in both regimes and is not affected by the proviso.
The common description, “14 per cent in the new regime and 10 per cent in the old”, is therefore accurate only for private employers.
The ITR-1 validation rules for AY 2026-27, published by the Directorate of Income Tax (Systems), apply the same split. Under the old regime they reject a section 80CCD(2) claim above 10 per cent of salary for an employer other than a Government, or above 14 per cent for a Government employer. They do not allow the deduction at all where the employer category is a pensioner category or “Not Applicable”.
The Rs 7.5 lakh ceiling on employer contributions
A separate rule taxes large employer contributions as a perquisite. Under section 17(2)(vii) of the 1961 Act, employer contributions to a recognised provident fund, the NPS and an approved superannuation fund are a perquisite “to the extent it exceeds seven lakh and fifty thousand rupees in a previous year”. Section 17(1)(h) of the 2025 Act has the same Rs 7,50,000. This applies in both regimes. See Perquisites and Form 12BA.
Which of the three survive the new regime
Section 115BAC(2)(i) of the 1961 Act denies every Chapter VI-A deduction “other than the provisions of sub-section (2) of section 80CCD or sub-section (2) of section 80CCH or section 80JJAA”. Section 202(2)(a)(xii) of the 2025 Act denies Chapter VIII “other than the provisions of section 124(1) and 124(2), or 125(2) or 146”.
| Deduction | Old regime | New regime |
|---|---|---|
| s.80CCD(1) / Sch. XV para 1(y) | Yes, within Rs 1,50,000 | No |
| s.80CCD(1B) / s.124(3) | Yes, Rs 50,000 | No |
| Minor’s account / s.124(4) | Yes, within the same Rs 50,000 | No |
| s.80CCD(2) / s.124(1), (2) | Yes, 10 or 14 per cent | Yes, 14 per cent |
The same rule applies to the Agnipath Scheme. Only the Central Government’s contribution survives: section 80CCH(2) of the 1961 Act and section 125(2) of the 2025 Act. The Agniveer’s own contribution under section 80CCH(1) (section 125(1)) does not.
An individual without business income leaves the new regime only in the return filed by the due date: section 115BAC(6) and section 202(4)(b). See Old or New Regime: The Choice for Employees.
What happens on exit
The deductions are recovered at the end. Under section 80CCD(3), the whole amount received on closure or opting out, and pension from an annuity bought on closure, is income of the assessee or nominee in the year of receipt. The exceptions are:
- an amount received by a nominee on the assessee’s death; and
- an amount used to buy an annuity in the same year, which section 80CCD(5) treats as not received.
Sections 124(6), (7) and (9) of the 2025 Act are the same. Section 124(11) and (12) add matching rules for subscribers to the Unified Pension Scheme. Separate exemptions for part of the lump sum on exit are outside this guide.
What to have ready
- The NPS transaction statement or contribution receipts, showing each payment into the account and its date.
- Form 16 (Form No. 130 from tax year 2026-27), showing the employer’s contribution included in salary and the section 80CCD(2) deduction allowed.
- The salary figure: basic pay, plus dearness allowance where the terms of employment count it. This is the base for the 10 and 14 per cent limits.
- Statements for a minor’s account, in the minor’s name, for any contribution claimed by a parent or guardian.
- The employer category (Central Government, State Government, public sector or other), because the return’s limits turn on it.
Proof to the employer
Up to FY 2025-26, rule 26C of the Income-tax Rules, 1962 requires the evidence in Form No. 12BB. From tax year 2026-27, rule 205 of the Income-tax Rules, 2026 requires Form No. 124. Its serial number 4 calls for “Evidence of investment or expenditure” for any Chapter VIII deduction. The employer allows section 80CCD(2) on its own records. A contribution not shown to the employer can still be claimed in the return.
After filing
A wrong split between (1) and (1B), or a missed contribution, can be corrected in a revised return; see Belated and Revised Returns. An updated return cannot reduce tax or increase a refund (proviso to section 139(8A); section 263(6)(c) of the 2025 Act), so it cannot be used to add a deduction.
In order
- Fix the Act: section 80CCD for FY 2025-26 and earlier; Schedule XV para 1(y) and section 124 from tax year 2026-27.
- Decide the regime. Under the new regime, only the employer’s contribution counts.
- Work out the employer’s limit: 14 per cent of salary for a Government employer; for any other employer, 10 per cent under the old regime and 14 per cent under the new.
- Under the old regime, place own contributions first under section 80CCD(1), within 10 per cent of salary (20 per cent of gross total income if not an employee) and within the Rs 1,50,000 shared with section 80C.
- Claim the rest of the own contribution, and any contribution to a minor’s account, under section 80CCD(1B), up to Rs 50,000 in all, without counting any rupee twice.
- Check the Rs 7,50,000 ceiling on the employer’s combined PF, NPS and superannuation contributions.
- Give the employer the evidence, and claim anything missed in the return filed by the due date.
The next guide, Health Insurance and Medical Costs: Section 80D, deals with the deduction for health insurance premiums and medical expenditure.