Tax Benefits of NPS (2025/2026): What’s New & What to Know

Retirement planning in India has always revolved around two big questions – how much should you save and where should you invest? Over the years, the National Pension Scheme (NPS) has become one of the preferred options for individuals who want a mix of market-linked returns and structured retirement income. Apart from its role as a long-term investment tool, NPS stands out for the tax benefits it offers to salaried individuals, self-employed professionals, and even employers.

With recent updates in 2025/2026, including new provisions like the Unified Pension Scheme (UPS) and extensions of existing deductions, there’s a lot for taxpayers to note. This guide breaks down the key tax advantages, what has changed, and how you can look at NPS within your financial planning journey.

What is NPS and Why is it Popular?

The National Pension Scheme is a government-regulated retirement savings option managed by the Pension Fund Regulatory and Development Authority (PFRDA). Open to Indian citizens and NRIs between 18 and 70 years, it allows contributions into Tier-I (retirement-focused) and Tier-II (voluntary savings) accounts.

Unlike traditional savings options that give fixed returns, NPS investments grow based on market performance through a mix of equity, debt, and government securities. Over time, this makes it a practical choice for building a retirement corpus, while also giving you immediate relief in the form of tax savings.

Tax Benefits for Employees on Self-Contribution

When you, as a salaried individual, contribute to NPS, you can claim deductions under two sections of the Income Tax Act:

• Section 80CCD(1): Deduction up to 10% of salary (Basic + DA), within the overall ceiling of ₹1.5 lakh under Section 80CCE.
• Section 80CCD(1B): An additional deduction of up to ₹50,000, over and above the Section 80CCE limit.

Tax Benefits on Employer’s Contribution

For salaried employees whose employers also contribute to their NPS accounts, there are further benefits:

• Section 80CCD(2): Under Section 80CCD(2), you can claim a deduction on your employer’s contribution to NPS, up to 10% of your salary (14% if you are under the new tax regime)
• Under the new tax regime, employees of the Central Government are eligible to claim a deduction of 14% of their salary for NPS contributions by the employer.

This deduction is separate from the 80C limit, making it an additional advantage. For many employees, this becomes a win-win because both their retirement savings and take-home tax savings increase.

Tax Benefits for the Self-Employed

NPS isn’t just for salaried workers. Self-employed professionals, freelancers, and business owners can also avail tax deductions:

• Section 80CCD(1): Deduction up to 20% of gross total income, subject to the overall ceiling of ₹1.5 lakh under Section 80CCE.
• Section 80CCD(1B): Additional deduction of up to ₹50,000, similar to salaried individuals.

For independent earners, this provides a structured way to save for retirement while reducing taxable income.

Tax Benefits on Partial Withdrawal

Life can bring unexpected expenses – children’s education, medical emergencies, or housing. Recognising this, NPS allows partial withdrawals under specific conditions.

• Withdrawals of up to 25% of self-contribution are eligible for exemption under Section 10(12B).
• These exemptions apply only when the withdrawal fits the terms prescribed by PFRDA.

This strikes a balance between keeping your retirement savings intact and allowing flexibility in genuine cases of need.

Tax Benefits on Lump Sum Withdrawal

At retirement or upon reaching 60, NPS subscribers can withdraw a portion of their accumulated corpus:

• Up to 60% of the corpus can be taken as a lump sum, which is exempt under Section 10(12A).
• The remaining 40% must be used to purchase an annuity, which then pays out as a pension.

This structure ensures that you get immediate access to funds while securing a steady income stream.

Tax Benefits on Annuity Purchase

When you purchase an annuity using your NPS savings:

• The purchase amount is exempt under Section 80CCD(5).
• However, the annuity income received periodically is taxable as per your income slab.

This distinction is important because while up to 60% of your lump sum withdrawal is tax-free, your pension payouts from the annuity are taxable as income.

Tax Benefits for Employers/Corporations

Employers too gain tax advantages when contributing to their employees’ NPS accounts:

• Under the new tax regime, employer contributions up to 10% of salary (Basic + DA) are allowed as a business expense under Section 36(1)(iv)(a).

This makes NPS a valuable part of employee benefit packages, offering both retention benefits and tax deductions for businesses.

What’s New in 2025/2026?

The 2025 updates introduced the Unified Pension Scheme (UPS), designed primarily for central government employees and retired NPS subscribers. Some highlights include:

• A guaranteed minimum pension option under UPS.
• The same tax benefits available under NPS are extended to UPS subscribers.
• Flexibility for existing NPS retirees to migrate to UPS.

Additionally, tax benefits were extended to NPS Vatsalya, allowing parents to contribute towards a pension account for minor children, with the same deductions applying once the account is converted at adulthood.

These changes make NPS more inclusive and flexible, while reinforcing its role in long-term retirement planning.

Conclusion

The tax benefits of NPS (2025/2026) make it one of the most versatile retirement planning tools in India. From self-contributions to employer benefits, partial withdrawals, and new options like UPS (Unified Pension Scheme) and NPS Vatsalya, the scheme offers flexibility while keeping retirement savings disciplined.

If you’re evaluating tax-saving avenues this year, NPS is worth considering alongside other investments – especially if your goal is long-term financial security combined with immediate tax efficiency.

Frequently Asked Questions

1. Can I claim NPS deductions under both the old and new tax regimes?

Deductions under Sections 80C and 80CCD are available only under the old tax regime. Under the new regime, most exemptions and deductions are not applicable.

2. Is Tier-II NPS account eligible for tax benefits?

Tier-II contributions are generally not eligible, except for government employees, provided there is a lock-in of three years.

3. Are annuity payouts from NPS tax-free?

No, while the amount used to buy the annuity is exempt, the pension income you receive is taxable as per your income slab.

4. Can NRIs open an NPS account?

Yes, Non-Resident Indians can open NPS accounts, but certain conditions around documentation and repatriation may apply.

5. How flexible is NPS if I change jobs or move cities?

NPS is fully portable across employers and locations. Your PRAN (Permanent Retirement Account Number) remains valid throughout your lifetime.