NPS Tax Benefit 2026

Last Updated: March 27, 2026

NPS Tax Benefit 2026: Section124 Rs 50K & Employer NPS

Section 124 Extra Rs 50,000 and Employer NPS in New Regime

Part of the Income Tax India 2026 : Income Tax India 2026 : A Complete Guide

Most salaried employees max out their Section 123 limit with EPF, ELSS, and PPF — and then stop. They think they have done everything possible.

They are leaving Rs 50,000 on the table.

Section 124 allows an additional Rs 50,000 deduction for NPS Tier I contributions, completely separate from the Rs 1.5 lakh Section 123 limit. At the 30% tax bracket, that extra Rs 50,000 deduction saves Rs 15,600 in tax every year — money that stays in your pocket, not the government’s.

And for those in the new tax regime — NPS still has a card to play. Employer NPS contribution under Section 124 is the only significant deduction available in the new regime besides the standard deduction.

This article covers every NPS tax benefit in 2026 — all three sections, old vs new regime, Tier I vs Tier II, and the tax treatment at maturity.

Rs 50,000 Extra deduction under Sec.124 — over and above Rs 1.5L 123 limit

Both Regimes Employer NPS Sec.124– only major deduction in new regime

Rs 2,00,000 Maximum total NPS deduction in old regime Sec.124

60% Tax-Free Lump sum withdrawal at maturity — at age 60

Three NPS Tax Sections — Complete Comparison

NPS tax benefits are spread across three sub-sections of Sec.124. Each operates independently with its own limit and regime availability.

Section	Who Contributes	Deduction Limit	Regime	Over and Above 123 ?
124	Employee / Self-employed own contribution	Salaried: up to 10% of Basic + DA. Self-employed: up to 20% of gross total income. Subject to Rs 1.5L combined 123 ceiling.	Old regime only	No — within Rs 1.5L 123 ceiling
124	Employee / Self-employed own contribution (additional)	Up to Rs 50,000 per year	Old regime only	YES — extra Rs 50,000 above Rs 1.5L ceiling
124	Employer contribution to employee’s NPS account	Private sector: up to 10% of Basic + DA. Government employees: up to 14% of Basic + DA. No upper rupee limit.	BOTH regimes	YES — additional, no ceiling impact

Aggregate cap: employee contributions (124) together cannot exceed Rs 2,00,000 in one year. Employer contribution under 124 is separate — no cap in rupee terms, only a percentage limit.

Old Regime vs New Regime — NPS Deductions

This is where most confusion lies. Here is a clear comparison of what NPS deductions you can claim under each regime.

NPS Deduction	Old Tax Regime	New Tax Regime	Practical Implication
own contribution within 123	Available — up to 10% of salary within Rs 1.5L ceiling	NOT available	Old regime allows NPS as part of 123 . New regime: no benefit.
extra Rs 50,000 own contribution	Available — Rs 50,000 above Rs 1.5L ceiling	NOT available	Most valuable NPS benefit — old regime only. Saves Rs 15,600/yr at 30% bracket.
employer NPS contribution	Available	Available — this is the ONLY major deduction in new regime	If your employer contributes to NPS, this is a significant advantage in new regime.

Worked Example — NPS Benefit in Old vs New Regime at Rs 15L Salary

Income Component	Old Regime Calculation	New Regime Calculation
Gross Salary	Rs 15,00,000	Rs 15,00,000
Standard Deduction	Rs 50,000	Rs 75,000
123 (EPF + ELSS + PPF)	Rs 1,50,000	Not available
124 — extra NPS	Rs 50,000	Not available
124 — employer NPS (10% of Rs 8L basic)	Rs 80,000	Rs 80,000 — available in new regime too
Taxable Income	Rs 15,00,000 minus Rs 3,30,000 = Rs 11,70,000	Rs 15,00,000 minus Rs 1,55,000 = Rs 13,45,000
Tax (approx)	Rs 161,000 + 4% cess = Rs 167,440	Rs 81,750 + 4% cess = Rs 85,020

Note: Illustrative calculation only. Actual figures depend on exact salary structure, applicable regime slabs, and surcharge.

One has to check total tax in both the regimes after considering all the other available deductions like HRA, home loan interest, medical insurance, donation, etc. Thereafter, he can opt for the appropriate regime.

Tier I vs Tier II — Tax Difference

Feature	Tier I (Pension Account)	Tier II (Voluntary Savings Account)
Purpose	Primary retirement account — mandatory for NPS	Voluntary savings — optional
Withdrawals	Restricted — only at retirement (60) or specific conditions before	Fully flexible — withdraw any time, any amount
124 deduction	Yes — own contributions eligible	No — not eligible for any tax deduction
124 deduction	Yes — Rs 50,000 extra deduction	No
124 deduction	Yes — employer contributions eligible	No
Returns	Market-linked — equity, corporate bonds, govt securities	Market-linked — same investment options
Best suited for	Long-term retirement saving with tax benefits	Short to medium term savings with full liquidity — but no tax benefit

NPS Maturity and Withdrawal Tax Rules

NPS maturity tax treatment is one of the most misunderstood aspects. Here is the complete picture from npstrust.org.in.

Withdrawal Type	When	Tax Treatment
Lump Sum at Maturity (Age 60)	At age 60 or superannuation	60% of total corpus is tax-free under Schedule II(6). This is a significant benefit.
Annuity Purchase at Maturity	Mandatory — at least 40% of corpus must be used to buy annuity	Amount invested in annuity is tax-free at purchase under Section 124. But annuity income received monthly/annually is taxable at your slab rate.
Partial Withdrawal (before 60)	After 3 years, for specified purposes — higher education, marriage, home purchase, critical illness	Up to 25% of own contributions is tax-exempt under Schedule III(4). Applies to specified purposes only.
Premature Exit (before 60)	After 5 years for any reason	Only 20% can be withdrawn as lump sum (taxable). 80% must be used to buy annuity (annuity income taxable at slab).
Death of Subscriber	Any time	Entire corpus paid to nominee — fully exempt from tax.

The most important withdrawal rule: at age 60, you get 60% tax-free. But the 40% annuity income you receive monthly for the rest of your life is fully taxable at your slab rate. This is why NPS is excellent for building a corpus but has a tax liability at the income stage — unlike PPF, where even the interest received is tax-free throughout.

Frequently Asked Questions

Conclusion

NPS offers India’s most powerful additional tax deduction after 123 . Here is your action plan:

• Old regime: Invest Rs 50,000 in NPS Tier I under 124. At 30% bracket, saves Rs 15,600 in additional tax every year.
• New regime: Ask your HR if employer NPS contribution 124 can be included in your CTC restructuring. This is the only major deduction available.
• Maturity: 60% lump sum is tax-free at age 60. Plan for the annuity income being taxable at retirement.

For complete 123 options including NPS: NPS Tax Benefit 2026

For PPF vs NPS comparison in detail: PPF Interest Rate, Limit,Withdrawal & EEE Benefits 2026

NPS Tax Benefit 2026

For all 15 ways to save tax: How to Save Income Tax India 2026: 15 Legal Ways

Mutual Funds India 2026: Complete Beginner’s Guide 

Author

CA Ajay Khandelwal is a Chartered Accountant and financial expert with over 21 years of experience in taxation, compliance, and business advisory. As a key expert at AspirixWriters, he provides practical insights on income tax, financial planning, and regulatory matters, helping readers make informed financial decisions.

Author profile CA. Ajay Khandelwal

Disclaimer

This article is for educational and informational purposes only. It is not personal tax or investment advice. NPS is a market-linked product — returns are not guaranteed. Tax rules for NPS are based on pfrda.org.in, npstrust.org.in, and incometaxindia.gov.in. Please consult your Chartered Accountant before making investment or tax decisions based on NPS.

References

[1] NPS Trust — Tax Benefits under NPS | 124 Rs 50,000 | 60% lump sum tax-free Section Schedule II(6) | Partial withdrawal Schecule III(4) | Annuity tax treatment | npstrust.org.in — https://npstrust.org.in/benefits-of-nps

[2] PFRDA — NPS for Corporates | Section 124 employer contribution | 10% private / 14% government | Both regimes | Rs 7.5L aggregate cap | pfrda.org.in — https://www.pfrda.org.in/web/pfrda/schemes/national-pension-system/nps-for-corporates

[3] Income Tax Department — Deductions | Section 124 limits | 124 old regime only | 124 both regimes | Combined ceiling with 123 | incometaxindia.gov.in —

[4] Income Tax Act 2025 (Act 30 of 2025), egazette.gov.in | Schedule II(6) — 60% lump sum tax-free | Schecule III(4) — partial withdrawal exempt | Section 124 — annuity taxable | Section 124 — annuity purchase exempt — https://egazette.gov.in