Employer NPS Contribution at 14%: The One Tax Break Left in the New Regime
An employer's contribution to an employee's NPS account is deductible up to 14% of basic plus DA in the new regime (10% in the old regime for private employers), on top of other limits. Employer PF, NPS and superannuation together are tax-free only up to ₹7.5 lakh a year. Restructuring within CTC can save tens of thousands in tax.
Most deductions vanished in the new tax regime. One that survived, and got better, is the employer's contribution to an employee's National Pension System (NPS) account. Few small companies offer it, so it is an easy way to raise take-home value without raising cost.
The rule
The employer's contribution to an employee's NPS account is deductible for the employee:
- ✓up to 14% of salary (basic plus dearness allowance) in the new regime;
- ✓up to 10% of salary in the old regime for private-sector employees.
The 14% limit for private-sector employees in the new regime has applied from FY 2025-26. It is separate from the ₹1.5 lakh 80C limit.
The ₹7.5 lakh cap
Employer contributions to PF, NPS and superannuation together are tax-free only up to ₹7.5 lakh a year. Anything above that, and the return earned on it, is taxed as a perquisite. Only senior, highly paid staff usually reach this cap.
A worked example
A manager's annual basic salary is ₹12,00,000 and taxable salary is ₹24,00,000 (not counting the employer's PF). The company restructures, without changing CTC, to pay 14% of basic into NPS: ₹1,68,000 a year.
| Before | After | |
|---|---|---|
| Taxable salary (new regime, after ₹75,000 standard deduction) | ₹23,25,000 | ₹21,57,000 |
| Tax with cess | ₹2,92,500 | ₹2,48,820 |
| Tax saved | about ₹43,700 a year |
The employee's PF of ₹1,44,000 (12% of basic) plus NPS of ₹1,68,000 is ₹3,12,000, well within the ₹7.5 lakh cap.
How to set it up
- Register as a corporate under NPS through a point of presence, usually a bank.
- Make it optional. NPS money is locked in until retirement, with limited withdrawals, so let employees opt in.
- Restructure within CTC. Reduce a taxable allowance by the NPS amount so cost does not change.
- Deposit monthly with the payroll run, and show it on the payslip.
- Track the ₹7.5 lakh cap for senior employees.
Frequently asked questions
Can the employee's own NPS contribution be deducted in the new regime?
No. Only the employer's contribution is deductible in the new regime.
Does NPS reduce PF?
No. PF is calculated on PF wages separately. NPS is an addition or a reallocation within CTC.
Is it worth it for low-paid employees?
Employees whose income is fully tax-free under the new regime gain no tax benefit, though they still build retirement savings.
Sources
- ✓NPS taxation after Budget 2024: old vs new regime, Business Today
- ✓80CCD(2) in the new tax regime, TaxBuddy
Figures are illustrations for a resident individual below 60, without surcharge. This is not tax advice.
Written by
HR Manager, Airwix Technologies (Sleet)
Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.
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