Can NPS Help You Save Tax in the New Regime? What Salaried Employees Must Know

If you are a salaried employee under the new tax regime, you may have already noticed that most traditional tax-saving avenues have  narrowed. Investments under Section 80C, HRA benefits and several common deductions no longer offer the same relief.

However, one important — and often overlooked — route still helps reduce taxable income: Employer contributions to NPS.

The new tax regime introduced by the Income Tax Department was designed to simplify taxation by offering lower slab rates in exchange for removing most exemptions and deductions. As a result, salaried employees now have fewer tools available for active tax planning.

This is where employer contributions to NPS stand out.

Ritesh Sabharwal, Certified Financial Planner and personal finance expert, noted in a LinkedIn post:

"Are you salaried and in the new regime? Are you missing out on NPS? Employer’s NPS contribution is one of the few tax-free components still available."

Under Section 80CCD(2), an employer can contribute:

• Up to 10% of Basic + DA for private-sector employees
• Up to 14% for government employees

This contribution to the National Pension System (NPS) Tier-I account is deductible and reduces the employee’s taxable income — even under the new tax regime.

In simple terms, the employer’s NPS contribution is treated as a retirement investment made on behalf of the employee. Since it is deducted before tax calculation, it lowers the taxable income directly.

Sabharwal explains with an example:

If your basic salary is ₹50,000 per month and your employer contributes 14% to NPS, that equals ₹7,000 monthly or ₹84,000 annually.

For someone in the 30% tax bracket, this could translate into tax savings of around ₹25,200 per year — while the invested amount continues to grow for retirement.

Beyond the immediate tax benefit, the funds are invested in market-linked instruments, offering long-term compounding potential and helping build a structured retirement corpus.

Earlier, one of the concerns around NPS was its long lock-in period. However, regulatory changes by the Pension Fund Regulatory and Development Authority (PFRDA) have introduced greater flexibility.

• Partial withdrawals are allowed after three years (subject to conditions)
• Structured withdrawal options are available at retirement
• Systematic access to funds has improved

Sabharwal observes that earlier NPS felt completely locked in, but now partial withdrawals and structured exit options make it more practical for long-term financial planning.

This makes NPS easier to integrate into an overall financial strategy rather than treating it as inaccessible money until retirement.

For many salaried professionals, employer NPS contributions may already be part of the Cost-to-Company (CTC) structure — but the tax impact often goes unnoticed.

Reviewing salary slips and consulting HR can help employees determine:

• Whether employer NPS contribution is included
• Whether the salary can be restructured to incorporate it
• How it impacts taxable income

Sabharwal advises employees to verify if their CTC includes employer NPS. If not, discussing salary restructuring with HR may help unlock both tax savings and long-term retirement benefits.

In a tax system where most deductions have been curtailed, employer contributions to NPS offer a rare combination of:

• Tax efficiency
• Retirement discipline
• Long-term compounding
• Structured wealth creation

For salaried employees — especially those already investing in mutual funds — NPS can act as a retirement-focused complement rather than a replacement.

In the new regime, where tax planning options are limited, NPS stands out as a quiet but powerful advantage.

Understanding how this component works can help employees make smarter decisions about their salary structure, tax liability and long-term financial security.

Disclaimer This article is for informational and educational purposes only. It should not be considered as financial, tax, or investment advice. Tax laws and regulations are subject to change and may vary based on individual circumstances. Readers are advised to consult a qualified tax consultant, chartered accountant, or financial advisor before making any tax-related or investment decisions. The author and publisher are not responsible for any losses arising from reliance on the information provided above.

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