What it is
The National Pension System (NPS) is a retirement savings scheme. NPS Trust, which oversees it, publishes a page on the tax benefits available under the scheme. Those benefits sit in three parts of the Income-tax Act: Section 80CCD(1), Section 80CCD(1B) and Section 80CCD(2).
A deduction reduces the income on which tax is calculated. It does not reduce your tax bill rupee for rupee. How much tax you save depends on your tax slab and on which tax regime you use.
How it works
Which regime applies to you decides whether deductions matter at all. The Income Tax Department says the Finance Act 2023 changed Section 115BAC so that the new tax regime became the default from assessment year 2024-25. Individuals, Hindu Undivided Families and certain other taxpayers can still opt out and be taxed under the old regime. Our guide to the old and new tax regime covers the difference.
Because the regimes treat deductions differently, check which NPS sections you can claim under the regime you choose. The exact limits and conditions for each section are on the NPS Trust page and in the Income-tax Act. This article does not quote them, so confirm them there before you plan.
For salaried people, the claim usually starts with the employer. Form 12BB is the form an employee gives the employer with evidence of tax-saving claims on eligible payments or investments. The employer uses it to calculate tax deducted at source (TDS) on salary.
After the year ends, the employer issues Form 16. It records your income, deductions and the tax deducted. You then use these figures when you file your income tax return. Our income tax calculator lets you compare your tax under both regimes.
Common mistakes to avoid
- Assuming the deduction applies automatically. The new regime is the default, so if you want to be taxed under the old one you must choose it.
- Not telling your employer. If you do not submit your claims through Form 12BB, TDS may be calculated without them. You may then have to claim the difference when you file your return.
- Mixing up the three sections. 80CCD(1), 80CCD(1B) and 80CCD(2) are separate provisions with their own conditions. Read each one rather than treating them as a single limit.
- Relying on old figures. Limits can change with each Budget, so check the current rule on the NPS Trust page or the Income Tax Department site.
