A voluntary, government-backed contributory retirement scheme in India offering market-linked returns and unique corporate tax deductions.
- Category
- Payroll & Compensation
- Legal status
- Governed by Indian law
- Relevant to
- HR, payroll & finance
- Reading time
- 3 min
What is National Pension System (NPS)?
The National Pension System (NPS) is a regulated long-term pension product overseen by PFRDA. Under Corporate NPS, employer contributions to an employee's account are deductible up to 14% of Basic + DA under the new tax regime (and for government employers), and up to 10% for private-sector employers under the old regime. Employees can also claim an extra deduction of up to ₹50,000 for their own contributions under the old regime.
Key takeaways
- 1The National Pension System (NPS) is a regulated long-term pension product overseen by PFRDA.
- 2Under Corporate NPS, employer contributions to an employee's account are deductible up to 14% of Basic + DA under the new tax regime (and for government employers), and up to 10% for private-sector employers under the old regime.
- 3Employees can also claim an extra deduction of up to ₹50,000 for their own contributions under the old regime.
Why National Pension System (NPS) matters
Provides high-earning salaried professionals with significant tax savings while constructing a robust retirement corpus.
How National Pension System (NPS) works in practice
- 1
Define the rule
Write down how National Pension System (NPS) is calculated or applied in your offer letters and compensation policy, including the components it is based on.
- 2
Configure it once
Set National Pension System (NPS) in the salary structure so every employee is processed with the same formula instead of manual spreadsheets.
- 3
Run & validate
Process the monthly payroll, then review variances, arrears and exceptions linked to National Pension System (NPS) before approving the run.
- 4
Report & reconcile
Match payslips, bank transfers and statutory challans so National Pension System (NPS) is traceable during audits.
Real-world example
An employee opts into Corporate NPS, allowing their employer to route 10% of their monthly Basic Salary into Tier 1 NPS, reducing their taxable salary.
Indian statutory reference
PFRDA Act, 2013 and the Income-tax Act, 2025 provisions corresponding to sections 80CCD(1B) and 80CCD(2) of the Income Tax Act, 1961.
Rates, limits and state rules change often. Confirm against the latest notification or with your compliance advisor.
Best practices and common mistakes
Best practices
- Document how National Pension System (NPS) is calculated in the compensation policy and share it with employees.
- Keep salary components mapped to the correct statutory heads (PF, ESIC, PT, TDS).
- Reconcile payroll registers against bank and challan data every month.
- Review structures after every law or wage-ceiling revision.
- Retain payroll records for the period prescribed by law.
Common mistakes
- Treating National Pension System (NPS) inconsistently across employee groups or locations.
- Calculating on the wrong wage base, which flows into PF, gratuity and bonus errors.
- Changing salary components mid-year without updating tax projections.
- Relying on manual spreadsheets that break during mid-month joiners and exits.
Managing National Pension System (NPS) in SleetHR
SleetHR applies National Pension System (NPS) through configurable salary structures, auto-calculates statutory deductions, and generates payslips, registers and challans from the same source of truth.