Can NPS Really Save You Tax Now? What Most Employees Don’t Know

Employees want to build a secure future while minimising their tax liabilities. With rapidly increasing inflation and a distant retirement, this becomes a larger challenge. This is where the National Pension System (NPS) comes into the picture. Even though NPS is often overlooked, it can provide tax savings because it is a government-backed retirement savings scheme. With the new tax regime 2026 updates, the NPS tax saving scheme becomes even more intriguing. 

What tax-saving wonders do most employees overlook? This guide gives you NPS Tax Benefit New Regime details, National Pension System Tax Saving tips, NPS Deduction details for salaried employees, and information on retirement tax planning India for NPS. By the end of this guide, you will know if NPS meets your financial needs.
 

Important Facts about NPS that Everyone Should Know

The NPS, or National Pension Scheme, is a government-sponsored, voluntary, long-term retirement savings scheme designed to give people a robust way to save through their years of work. It was put into action by the Pension Fund Regulatory and Development Authority (PFRDA) in 2004 and is meant to support people in the years following full-time employment. 

NPS invests in a mix of equities, debt instruments, and government-backed securities. Returns are not fixed like what is obtained from a traditional Fixed Deposit account, or a Provident Fund; with NPS, the returns are linked to market performance, giving the account holder the potential to obtain a greater return, surpassing the increase in costs of living.

NPS accounts are categorised into Tiers: there is a Tier 1 account, and there is a Tier 2 account. Tier 1 accounts are mandatory accounts for retirement savings and do not allow the account holder to access their funds held in the account until that individual is at least 60 years of age. 

Tier 2 accounts are voluntary savings accounts that can be accessed at any time. Tier 1 accounts are the only accounts that allow the account holder to realise tax benefits; therefore, Tier 1 accounts are a part of retirement tax planning in India. NPS accounts can also be part of a salary structure in the case of salaried individuals, making NPS unique since there is a possibility of voluntary contributions from both the employee and the employer.

The National Pension Scheme is a unique retirement tool that, in the case of the Indian tax system, has the potential to save people from a significant tax burden. Recent changes in tax laws have made NPS a lot more tax-efficient.

NPS tax benefits in the new regime have changed quite a bit. In the last tax regime, if you contributed to the National Pension Scheme, you could claim a maximum of Rs. 1.5 Lakhs as a tax deduction under the 80CCD(1) section (this amount is included in the total 80C limit), and also claim a tax deduction of Rs. 50,000 under section 80CCD(1B) in addition to that. In the new tax regime, the flexibility to not include personal contributions in the tax benefits is, for the most part, true.

However, the NPS has not been left behind completely. The new tax regime still has a National Pension Scheme tax benefit that is applicable and that is the employee’s contribution to it under section 80CCD(2). 

As for the most recent changes applicable from FY 2025-2026, (which are applicable to new tax regime 2026 filers), an employer is allowed to pay, as an NPS Tier I account holder, to employee’s basic pay plus the dearness allowance (DA) up to 14% of that total amount, and that amount is tax-exempt under income tax for whichever regime you are under. This uniform 14% limit has been introduced for both government and private employees and is an increase from the 10% limit for private employees.

Let us take the example of an annual salary of Rs 10 lakhs. Your employer may contribute Rs 1.4 lakhs to your NPS account. This will allow you to reduce your taxable income by Rs 1.4 lakhs. Assuming you are in the 30% tax bracket, you will save Rs 42,000 in taxes. The best part is that you do not have to spend any additional money. This explains the benefit of the NPS of the National Pension System tax savings, particularly for those who have recently migrated to the new regime for lower tax bracket benefits.

Most employees are not aware that the employer's contribution is not included in their Rs 1.5 lakhs 80C limit in the old regime, which makes it an over-and-above benefit. In the new regime, it is one of the few remaining deductions in addition to the standard deduction (which is now Rs 75,000) and family pension exemptions.
 

National Pension System Tax Saving for Salaried Employees

Salaried employees often switch between tax-saving options like the EPF, PPF, ELSS, etc. However, NPS deduction for salaried employees is unique because of the dual contribution benefit. Your employer's NPS contribution can be deducted from your salary, which is also considered a business expense for your employer, thereby reducing your tax computation.

The updated tax regulations for 2026 will begin to eliminate personal exemptions such as home loan interest and medical insurance premium deductions. This makes NPS employer contributions extremely valuable. As government employees have received a 14% benefit for years, the 2025 budget extension to private sector employees is significant. If your employer provides NPS as a part of the corporate strategy, you can ask to have part of your CTC (Cost to Company) shifted to NPS. This will increase your net pay.

Let’s say an employee earns Rs 15 lakh in the new tax regime, and NPS is not offered. Assuming a basic salary of Rs 10 lakh and 14% employer NPS contribution, their tax will be around Rs 1.56 lakh (this is after the standard deduction). As such, in this case, personal NPS contribution (which has the additional effect of being own funds locked-in beyond the retirement goal) will be approximately Rs 42,000 (i.e. the difference in tax liability with and without NPS). Therefore, the NPS in this case is effectively without personal contribution and without its own funds locked in beyond the retirement goal.

Many employees are unaware that not all companies promote NPS. While most companies stick with EPF, you can still negotiate with your employer about including NPS, especially if you are in a higher tax bracket. NPS can also provide an exposure to equities up to 75%, with potential returns of 10-12% each year for a decade. That's much better than most fixed-income options.
 

Updates to the New Tax Regime for 2026 and Its Impact on NPS

In the fiscal year 2025-2026, the New Tax Regime 2026 has updated tax slabs. These include a 0% tax on income up to Rs. 3 Lakhs, 5% on income from Rs. 3 Lakhs to Rs. 7 Lakhs, 10% on Rs. 7 Lakhs to Rs. 10 Lakhs, 15% on Rs. 10 Lakhs to Rs. 12 Lakhs, 20% for Rs. 12 Lakhs to Rs. 15 Lakhs, and 30% for anything above Rs. 15 Lakhs. Many individuals will experience an effective tax-free income in the span of up to Rs. 12 Lakhs due to the tax rebate of up to Rs. 60,000.

In the case of employer contributions, NPS provides the most valuable tax advantage under the new regime. The 2026 budget drafts and wish lists suggest that this deduction be kept in future drafts to foster retirement savings. For those high earners in the Rs. 15-25 Lakhs range, switching to the new regime can be beneficial, even if there are no personal deductions.

Previously, you kept all the deductions but had to pay higher taxes with the new system. Someone earning Rs 20 lakh, with full 80C (Rs 1.5 lakh), NPS extra (Rs 50,000), and health insurance (Rs 25,000) may pay much lower tax under the previous system; however, the new one makes it easier to file taxes. It's all up to how many deductions you are entitled to, and NPS makes up the difference.
 

NPS Deduction for Salaried Employees

Looking closer, while many may be unaware, the 80CCD(2) benefit is without limit. It is a 14% cap per pay period, but the new tax regime does not count it. So, this is an under-the-radar tax saver. Contribution matching is an option for employees working for tech, finance or PSU employers.

Efficiency is improved due to tax-free, partial withdrawals for specific needs (education or medical) after 3 years.
 

NPS's benefits and drawbacks for tax savings

Pros:

• Employer contributions are tax-efficient under the new system.
• Improved retirement corpus through market-linked growth.
• Minimal expenses (fund management fees of 0.01–0.9%).
• Recent adaptability increases attractiveness.

Cons:

• Lock-in till 60 (restricted partial departures).
• Taxable is the annuity component.
• No returns are assured.
• Personal deductions were restricted to the previous era.

Conclusion

Indeed, NPS can help you save money on taxes right now, particularly with employer contributions under the new 2026 tax system. The majority of workers are unaware of how recent annuity reductions and increased flexibility make it an essential factor to take into account while arranging retirement taxes in India. It provides a well-rounded route to financial independence, regardless of your preference for the new NPS tax benefit scheme or the larger National Pension System tax savings.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.