Income Tax Savings Through NPS Contributions Under Old And New Regimes

Contributions to the government-approved pension schemes such as the National Pension System (NPS), the Unified Pension Scheme (UPS), and the Atal Pension Yojana offer tax reliefs to citizens under Section 80CCD of the Income Tax Act. It is part of the broader Section 80 dealing with exemptions and deductions. These schemes will help them accumulate an ample retirement fund.

What Section 80CCD Covers

Section 80CCD is divided into three parts. The first part, 80CCD(1), covers contributions made by employees or self-employed individuals. The second, 80CCD(1B), provides an extra deduction specifically for contributions to NPS. The third, 80CCD(2), deals with contributions made by employers to an employee's NPS account.

Tax professionals advise that while NPS offers valuable tax breaks, individuals can also expect long-term returns. As Rajesh Kumar Kar wrote on the TaxBuddy advisory blog:

"The National Pension Scheme is one of the most popular investment options in India for retirement planning, offering tax benefits under Section 80CCD of the Income Tax Act. Claiming these deductions correctly is important not only for saving tax but also for avoiding notices from the Income Tax Department."

Tax Benefits Under the Old Regime

If a taxpayer sticks with the old tax system, he/she can claim tax deductions in two ways. Under 80CCD(1), salaried employees and self-employed individuals can contribute to NPS up to 10 percent of their salary or 20 percent of their gross total income and claim the deduction. However, the combined limit for deductions under Sections 80C, 80CCC, and 80CCD(1) is capped at Rs. 150,000.

On top of this, 80CCD(1B) allows both groups an additional deduction of Rs. 50,000 exclusively for contributions to NPS. This extra benefit also covers contributions made to NPS Vatsalya accounts, which are accounts opened for minor children.

Together, this means that under the old regime, the maximum deduction available for an individual's own contributions is Rs. 200,000.

Tax Benefits Under the New Regime

The new tax regime offers lower tax rates but fewer deductions. Under this system, the taxpayer cannot claim deductions under 80CCD(1) or 80CCD(1B). The only benefit available is under 80CCD(2), which applies to employer contributions.

For private sector employees, the maximum employer contribution eligible for deduction is raised from 10 per cent to 14 per cent of salary of the employees (salary here means basic pay plus dearness allowance).

Section 80CCD(2) provides tax relief only for contributions made by an employer to an employee's National Pension System account. The benefit available under this section depends on whether the taxpayer has chosen the old tax regime or the new one.

In the old regime, the rules differ for private and government employees. Private‑sector workers can deduct employer contributions only up to 10 per cent of salary. Central and state government employees, however, are allowed a higher limit of 14 per cent of salary, and this applies under both regimes.

Because this provision applies exclusively to employer‑funded contributions, self‑employed individuals are not eligible to claim any deduction under Section 80CCD(2).

Who Can Benefit

The benefits of Section 80CCD are available only to individuals, not to Hindu Undivided Families or other entities. Both Indian residents and non-resident Indians can claim these deductions, only on the condition that they invest in government-approved pension schemes.

Age limits also apply. For NPS the contributer must be aged between 18 and 70 years at the time of joining and for the Atal Pension Yojana, the age is set between 18 and 40 years.