How employer contributions to NPS can push effective tax-free income to ₹13.5 lakh
With most taxpayers now opting for the new tax regime, employer contributions to the National Pension System (NPS) have emerged as one of the few remaining tax-saving opportunities. Experts say Section 80CCD(2) can effectively push the tax-free income threshold from ₹12 lakh to around ₹13.5 lakh while helping employees build a retirement corpus.
- Jun 13, 2026,
- Updated Jun 13, 2026 2:16 PM IST
As nearly 70% of taxpayers shift to the new tax regime, the National Pension System (NPS) has emerged as one of the few avenues that still offer tax benefits to salaried individuals. Industry experts say employer contributions under Section 80CCD(2) can effectively increase the tax-free income threshold from ₹12 lakh to around ₹13.5 lakh, while simultaneously helping employees build a retirement corpus.
According to Rajesh Khandagale, Senior Vice President – NPS at KFintech, employer contributions to NPS remain a significant exception in the new tax regime, where most deductions available under the old regime have been removed.
"Under the new tax regime, Section 80CCD(2) continues to provide a tax deduction on employer contributions to NPS. This is one of the few deductions available to salaried employees," Khandagale said.
How the mechanism works
Under Section 80CCD(2), employers can contribute up to 14% of an employee's basic salary plus dearness allowance (DA) to the employee's NPS account. This contribution is deductible from the employee's taxable income.
For instance, if an employee's basic salary and DA amount to ₹10 lakh annually, the employer can contribute ₹1.4 lakh to the NPS account. This amount becomes eligible for deduction, effectively increasing the tax-free income threshold from ₹12 lakh to approximately ₹13.5 lakh.
"There is no upper limit on this deduction under Section 80CCD(2). Employees should, however, consult a certified tax advisor for confirmation of the applicable tax benefits," Khandagale said.
MUST READ: Atal Pension Yojana vs NPS: Which government-backed pension scheme suits you?
Benefits across salary brackets
The tax benefit rises with the level of basic pay, making corporate NPS particularly attractive for middle- and higher-income salaried individuals.
For example:
Basic Salary + DA Maximum Employer Contribution (14%) ₹8 lakh ₹1.12 lakh ₹10 lakh ₹1.40 lakh ₹12 lakh ₹1.68 lakh ₹15 lakh ₹2.10 lakh ₹20 lakh ₹2.80 lakh
Since the deduction is linked to basic pay and DA, employees with higher salary structures can potentially enjoy larger tax savings while accumulating retirement wealth.
MUST READ: India’s retirement shock: 75% near age 60 lack a plan as savings fall 3.6x short of goal
Corporate NPS holds the key
Despite these benefits, adoption of corporate NPS remains relatively low. According to Khandagale, lack of awareness among companies and employees is one of the biggest barriers.
"Many corporates are still unaware of the tax advantages available under NPS. Companies can engage with Points of Presence (POPs) or Central Recordkeeping Agencies (CRAs), which guide them through the empanelment process," he said.
He added that employee registration is now fully digital and can be completed within minutes. KFintech has also developed an HRMS-integrated registration process that enables employee onboarding in less than 30 seconds.
MUST READ: What is NPS Sanchay? Who is it meant for and how will it work?
Integration simpler than perceived
Concerns over administrative complexity are also misplaced, according to Khandagale. Most HRMS and payroll systems already support NPS contributions and flexible benefit structures, making implementation similar to provident fund deductions.
With tax-saving options under the new regime limited, experts believe corporate NPS could play a bigger role in retirement planning and tax optimisation for salaried employees in the years ahead.
Taxpayers are advised to consult qualified tax professionals before making investment decisions or claiming tax deductions.
MUST READ: NPS exit planning: How to choose the best annuity amid tax, inflation and return trade-offs
As nearly 70% of taxpayers shift to the new tax regime, the National Pension System (NPS) has emerged as one of the few avenues that still offer tax benefits to salaried individuals. Industry experts say employer contributions under Section 80CCD(2) can effectively increase the tax-free income threshold from ₹12 lakh to around ₹13.5 lakh, while simultaneously helping employees build a retirement corpus.
According to Rajesh Khandagale, Senior Vice President – NPS at KFintech, employer contributions to NPS remain a significant exception in the new tax regime, where most deductions available under the old regime have been removed.
"Under the new tax regime, Section 80CCD(2) continues to provide a tax deduction on employer contributions to NPS. This is one of the few deductions available to salaried employees," Khandagale said.
How the mechanism works
Under Section 80CCD(2), employers can contribute up to 14% of an employee's basic salary plus dearness allowance (DA) to the employee's NPS account. This contribution is deductible from the employee's taxable income.
For instance, if an employee's basic salary and DA amount to ₹10 lakh annually, the employer can contribute ₹1.4 lakh to the NPS account. This amount becomes eligible for deduction, effectively increasing the tax-free income threshold from ₹12 lakh to approximately ₹13.5 lakh.
"There is no upper limit on this deduction under Section 80CCD(2). Employees should, however, consult a certified tax advisor for confirmation of the applicable tax benefits," Khandagale said.
MUST READ: Atal Pension Yojana vs NPS: Which government-backed pension scheme suits you?
Benefits across salary brackets
The tax benefit rises with the level of basic pay, making corporate NPS particularly attractive for middle- and higher-income salaried individuals.
For example:
Basic Salary + DA Maximum Employer Contribution (14%) ₹8 lakh ₹1.12 lakh ₹10 lakh ₹1.40 lakh ₹12 lakh ₹1.68 lakh ₹15 lakh ₹2.10 lakh ₹20 lakh ₹2.80 lakh
Since the deduction is linked to basic pay and DA, employees with higher salary structures can potentially enjoy larger tax savings while accumulating retirement wealth.
MUST READ: India’s retirement shock: 75% near age 60 lack a plan as savings fall 3.6x short of goal
Corporate NPS holds the key
Despite these benefits, adoption of corporate NPS remains relatively low. According to Khandagale, lack of awareness among companies and employees is one of the biggest barriers.
"Many corporates are still unaware of the tax advantages available under NPS. Companies can engage with Points of Presence (POPs) or Central Recordkeeping Agencies (CRAs), which guide them through the empanelment process," he said.
He added that employee registration is now fully digital and can be completed within minutes. KFintech has also developed an HRMS-integrated registration process that enables employee onboarding in less than 30 seconds.
MUST READ: What is NPS Sanchay? Who is it meant for and how will it work?
Integration simpler than perceived
Concerns over administrative complexity are also misplaced, according to Khandagale. Most HRMS and payroll systems already support NPS contributions and flexible benefit structures, making implementation similar to provident fund deductions.
With tax-saving options under the new regime limited, experts believe corporate NPS could play a bigger role in retirement planning and tax optimisation for salaried employees in the years ahead.
Taxpayers are advised to consult qualified tax professionals before making investment decisions or claiming tax deductions.
MUST READ: NPS exit planning: How to choose the best annuity amid tax, inflation and return trade-offs