PROSPERR.IO

Every rupee saved in tax is a rupee earned. Yet, many working professionals overlook one of the most powerful and completely legal tax deduction tools available to them — Section 80CCD(2) of the Income Tax Act. While most people are familiar with the standard 80C limit of Rs. 1.5 lakh, this specific provision sits entirely outside that cap and can shave off a significant chunk from taxable income without requiring any out-of-pocket investment from the employee.

This guide breaks down exactly how Section 80CCD(2) works, what qualifies, how much can be claimed, and what to watch out for — with real numbers and clear examples to make it actionable.

 

First, a Quick Primer: What Is NPS?

The National Pension System (NPS) is a government-regulated, market-linked retirement savings scheme open to Indian citizens aged 18 to 70 years. It is administered by the Pension Fund Regulatory and Development Authority (PFRDA). Under NPS, contributions are invested across equity, corporate bonds, and government securities, and the subscriber builds a retirement corpus over their working years.

For those in formal employment, NPS has a two-tier contribution structure:

• Employee's own contribution to NPS

• Employer's contribution to the employee's NPS account

Both contributions attract tax benefits, but they fall under different sections of the Income Tax Act. The employee's own contribution is covered under Section 80CCD(1), while the employer's contribution falls under Section 80CCD(2) and that's the one we're focusing on here.

 

What Does Section 80CCD(2) Actually Say?

Section 80CCD(2) allows a salaried individual to claim a deduction on the amount contributed by their employer towards the employee's NPS Tier-I account. This deduction is over and above the Rs. 1.5 lakh limit available under Section 80C or even the additional Rs. 50,000 under Section 80CCD(1B).

In plain terms: if the employer is routing part of the compensation into NPS on the employee's behalf, that amount does not form part of the taxable income subject to a ceiling.

 

The Ceiling: How Much Can Be Claimed?

The deduction under Section 80CCD(2) is capped at:

 

Note: From the Union Budget 2023-24, the 14% cap has been extended to all employees under the new tax regime — a significant parity brought in to make the new regime more attractive.

 

Breaking It Down with Numbers

Let's take a concrete example to see how this plays out.

Example 1: Private Sector Employee (Old Tax Regime)

In this case, Rs. 80,000 is completely excluded from taxable income. If the individual falls in the 30% tax slab, that translates to Rs. 24,000 in direct tax savings without spending a single extra rupee from their own pocket.

 

Example 2: New Tax Regime — 14% Cap Applies

 

At 30% tax slab, Rs. 1,40,000 in deductions saves Rs. 42,000 in taxes. The new regime now allows the 14% deduction for all employers — making it worthwhile to evaluate the new regime if the employer is contributing generously.

 

Key Conditions to Remember

Section 80CCD(2) is not available to everyone automatically. There are specific conditions that must be met:

1. The contribution must be made by the employer, not the employee. Self-employed individuals cannot claim this deduction.

2. The contribution must go specifically to the employee's NPS Tier-I account. Tier-II accounts do not qualify.

3. The deduction applies only to the extent of the employer's actual contribution you cannot claim more than what has been deposited.

4. The employer contribution should be part of the Cost to Company (CTC) structure or an actual additional contribution; fictitious entries will not qualify.

5. The deduction is capped at 10% (or 14% in applicable cases) of Basic Salary plus Dearness Allowance not total CTC or gross salary.

6. This benefit is available under both the old and new tax regimes, which makes it one of the rare deductions that works across both systems.

 

How It Stacks Up: The Full 80CCD Picture

To understand the full advantage of NPS tax benefits, here's how all the sub-sections connect:

 

This means a salaried individual with an employer contributing to NPS can potentially benefit from deductions under all three sub-sections — but the maximum collective benefit differs based on contribution levels and income.

 

Practical Points Worth Nothing

• Salary restructuring matters: Since the deduction is based on Basic Salary and DA, a higher basic component in the salary structure means a higher NPS contribution and a larger deduction. It may be worth discussing this with HR or payroll teams.

• No additional cash outflow for the employee: Unlike 80CCD(1B) where the employee has to park extra money in NPS, the 80CCD(2) deduction arises from the employer's contribution — so there's no extra cash being blocked by the employee.

• It's reflected in Form 16: The employer's NPS contribution and the resultant deduction should appear in Form 16 under Part B. Always verify this while filing returns.

• Both old and new tax regime: This is one of the very few deductions that is available under the new tax regime as well, making it especially important for those who have switched or are considering switching regimes.

• Withdrawals are taxed: While contributions attract tax benefits, partial or full withdrawals from NPS at retirement may be taxable (beyond the 60% lump sum exemption). Planning the exit strategy matters too.

 

Should the Employer NPS Contribution Be Part of CTC?

Whether the employer NPS contribution is an add-on over and above the existing salary or it's carved out of the existing CTC depends entirely on the company's compensation policy. Both are valid, but the impact on take-home pay differs:

For those structuring a new offer or negotiating a salary revision, exploring the possibility of including employer NPS as a component is worth the conversation.

A Quick Comparison: NPS vs. Other Tax-Saving Instruments

 

NPS, especially the employer contribution under 80CCD(2), stands out because it gives a tax benefit without requiring additional liquidity from the employee. The trade-off is that the corpus gets locked in until retirement, with only limited early withdrawal provisions.

 

Filing Your Return: What to Check

When filing the Income Tax Return (ITR), the deduction under Section 80CCD(2) needs to be mentioned correctly. Here's a quick checklist:

• Confirm the employer's NPS contribution from Form 16 (Part B, Section 'Deductions under Chapter VI-A').

• Cross-check with the NPS account statement available on the NSDL CRA portal (www.npscra.nsdl.co.in) or Fintech portal.

• Ensure the contribution reflects in the Permanent Retirement Account Number (PRAN) statement.

• In the ITR form, enter the amount under the 80CCD(2) row specifically — not under 80C or 80CCD(1B).

• If using a tax professional or CA, point this out specifically, as some filings miss this deduction.

 

Conclusion

Section 80CCD(2) is not a commonly discussed deduction, yet it carries the potential to meaningfully reduce taxable income without requiring any extra financial commitment from the employee. If the employer is already contributing to NPS — or if there's scope to structure the compensation to include it — this deduction deserves attention during tax planning, not just at the time of filing. Getting this right means money staying where it belongs: in the retirement corpus, not in unnecessary taxes.

Book a free tax assessment call with us now!

Frequently Asked Questions

1. Is Section 80CCD(2) available under the new tax regime?

Yes. This is one of the few deductions that has been retained under the new tax regime. Whether you opt for old or new, the employer's NPS contribution under 80CCD(2) remains deductible. In fact, from FY 2023-24, the cap for all employers under the new regime was raised to 14% of Basic + DA, which makes it even more beneficial for those who have switched.

 

2. What if the employer's NPS contribution exceeds the 10% or 14% cap?

The amount contributed by the employer beyond the specified cap will not be eligible for deduction and will be added back to the employee's taxable salary for that year. For example, if the basic salary is Rs. 8 lakh and the employer contributes Rs. 1 lakh (12.5%), only Rs. 80,000 (10%) qualifies for deduction; the remaining Rs. 20,000 will be taxable as perquisite income.

 

3. Can self-employed individuals claim deduction under Section 80CCD(2)?

No. Section 80CCD(2) is specifically for employer contributions and is applicable only to salaried individuals. Self-employed individuals can claim NPS-related deductions under Section 80CCD(1) up to 20% of gross total income, and additionally under Section 80CCD(1B) for up to Rs. 50,000, but 80CCD(2) is not available to them.

 

4. Does the employer NPS contribution count as a perquisite and get taxed?

Up to the specified limit (10% or 14% of Basic + DA), the employer's NPS contribution is not treated as a perquisite and is fully exempt from tax. Any amount in excess of this limit is treated as a taxable perquisite and added to the employee's gross salary. This is why structuring the contribution within the permissible ceiling is important.

 

5. What happens to the NPS corpus on maturity — is it also tax-free?

Partial tax exemption applies on maturity. Upon retirement at age 60, up to 60% of the NPS corpus can be withdrawn as a lump sum, which is fully exempt from tax. The remaining 40% must be used to purchase an annuity, and the annuity income received thereafter is taxable as per the slab rates applicable at the time of receipt. So while the contributions offer tax relief during the working years, the annuity portion does attract tax post-retirement.