NPS Tax Exemption (2026): Sections, Limits And Tax Benefits Explained

Launched by the Government of India in 2004 for government employees and later opened to all in 2009, the National Pension System (NPS) combines market-linked growth with compelling tax advantages¹. 

As of March 2025, the total subscriber base of the National Pension System (NPS) had grown significantly to over 165 Lakh.² Primarily because NPS is not just a retirement savings tool, but also one of the most tax-efficient investment instruments for Indian taxpayers. 

A three-tier deduction benefit helps NPS investors reduce their tax burden via three distinct Income Tax provisions. 

NPS investments fall under the Exempt Exempt Exempt (EEE) structure, as it allows deduction on contributions, tax-free growth, and partial tax-free withdrawals on maturity. 

With this, the NPS tax savings emerge as superior to many investments or retirement-savings options like the Equity Linked Savings Scheme (ELSS). 

This blog decodes the NPS tax exemption in detail to explain how investors plan their investments in a tax-efficient manner.

Sections Under NPS Tax Benefits

The NPS tax benefits in India emerge from three different sections of the Income Tax Act, 1961.³ Each of these tax exemptions covers a different contributor scenario and has its own NPS deduction limit.

1. Section 80CCD(1) Deduction

Section 80CCD(1) of the Income Tax Act enables NPS investors to claim deductions for their investments made to NPS. Irrespective of whether the investor is a salaried employee or a self-employed individual, this deduction can be claimed.

• Salaried Employees: In case the NPS investment is made for an employee via the corporation, both the employee and the employer invest a particular amount into the fund. In this instance, the employee's contribution is subject to the 80CCD(1) deduction. Under 80CCD(1), the employee can claim a deduction of till 10% of salary, which includes basic pay and the dearness allowance.
• Self-employed Individual: If a self-employed individual makes NPS investments for themselves, they can also claim a deduction for their contributions. Self-employed investors may contribute up to 20% of their total income to NPS in accordance with Section 80CCD(1).
• Overall Ceiling: According to Section 80CCE, investors of NPS can claim deductions under Section 80CCD(1) up to INR 1.5 lakhs. Thus, NPS competes with other investment schemes like Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), and life insurance premiums to claim deductions under this common bucket.

2. 80CCD(1B) Deduction: A Deduction Exclusive To NPS

A further deduction of up to INR 50,000 beyond the INR 1.5 lakh cap is permitted under Section 80CCD(1B) of the Income Tax Act, 1961. 

Any individual, salaried or self-employed, can claim this NPS deduction. Furthermore, the 80CCD(1B) deduction is formulated exclusively for NPS or the Atal Pension Yojana.

Therefore, with this NPS INR 50000 additional deduction, the maximum deduction under Section 80CCD(1) and Section 80CCD(1B), for contributions made in NPS, is INR 2 lakhs.

INR 1.5 lakhs under Section 80CCD(1) + INR 50,000 under Section 80CCD(1B) = INR 2 lakhs

3. Section 80CCD(2) Employer Contribution

As mentioned before, in the case of NPS investment for an employee, both the employee and the employer contribute a particular amount. An employer's contribution to an employee's NPS account is deductible under Section 80CCD(2). 

However, the method of this NPS tax exemption varies between private and public sector employers.

Source: Income Tax India⁴

Section 80CCD of the Income Tax Act has three distinct provisions that can be used by NPS investors to reduce their tax burden. 

However, it is important to note that the NPS tax exemptions apply only to the NPS Tier-I accounts. Contributions to NPS Tier-II accounts are not tax-deductible. Furthermore, the gains from tier-II accounts also get no special rebates or treatment, and the taxation is levied as per the marginal tax rate applicable to the investor. 

Subsequently, the utilisation of NPS tax exemption provisions depends to a significant extent on the income tax regime selected.

Treatment of NPS Tax Benefits In Old vs New Regime

The introduction of the new tax regime, which has become the default tax regime from FY 2023-24 onwards, has led to distinct treatment of various deductions and exemptions. The table below illustrates the NPS tax exemption treatment in various regimes.

Source: Income Tax India⁵

Therefore, under the New Income Tax Regime, NPS investors cannot claim the 80CCD(1) and 80CCD(1B) NPS tax exemption benefits, but retain the employer contribution deduction under 80CCD(2). 

On the other hand, the Old Income Tax Regime help investors to claim the entire EEE structure, as deductions are available in 80CCD(1), 80CCD(1B), and 80CCD(2).

Now that we understand the deduction benefits from NPS contributions, let us explore the taxability on maturity.

Taxation On NPS Maturity

Before 2019, the NPS investments in India came under the Exempt Exempt Tax (EET) category. This is because, although the investments and returns were exempted, maturity proceeds were fully taxable. However, the Union Budget 2019 allowed exemptions on maturity, resulting in the emergence of NPS Tier-I accounts as an EEE investment.⁶

Discussed below is the taxability of NPS on maturity. 

1. Tax Benefit on Lumpsum Withdrawal: Investors in NPS are entitled to a tax exemption on a lump sum withdrawal of 60% of the accumulated corpus in NPS upon reaching 60 years of age or superannuation under Section 10(12A). In this case of NPS tax-free withdrawal up to 60%, the word ‘superannuation’ implies the normal exit that NPS investors get at the age of 60.

2. Tax Benefit on Annuity: If an investor purchases an annuity on attaining 60 years of age or superannuation, they are eligible for an NPS tax exemption under section 80CCD(5). However, the income generated by the newly established annuity plan is taxed under 80CCD(3).

3. Tax Benefit on Partial Withdrawal: Investors are also eligible for an NPS tax exemption on partial withdrawals made up to 25% of the contributions made by themselves (self-contribution). However, this must be in accordance with the terms underlined by the Pension Fund Regulatory and Development Authority (PFRDA).

Source: NPS Trust⁷

An optimal understanding of the NPS tax exemption is incomplete without comparatively analysing it with other competitive investment mediums.

Is NPS Enough For Tax Saving?

Discussed below is a comparison of NPS with other long-term retirement schemes like ELSS and PPF to understand the tax efficiency.

However, optimal investment also requires optimal diversification.

Diversifying Beyond Tax Saving Instruments

Tax saving or tax planning is only one of the components of a successful investment plan; other goals like return optimisation, risk management, and so on are crucial as well. Without sufficient portfolio growth, tax planning yields little result. Therefore, not just tax-saving investments like NPS, but also fixed-income assets like bonds, debt mutual funds, high-yield FDs, and others can help earn stable growth.

Conclusion

The National Pension System remains one of the more tax-efficient long term retirement options available to Indian investors. With deductions under multiple sections of the Income Tax Act and partial tax free maturity benefits, NPS can help reduce your annual tax outgo while building a retirement corpus over time. 

However, tax saving alone should not define an investment strategy. A balanced portfolio often works better when retirement products like NPS are combined with fixed income assets that can offer stability and predictable returns across market cycles.

For investors looking to complement long term tax saving instruments with curated fixed income opportunities, Grip Invest can help diversify your portfolio beyond traditional retirement products.

FAQs On NPS Tax Exemption 2026

Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions.

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