For wage earning workers who have switched to the new tax regime, tax planning can seem a bit cramped. Here, many traditional deductions are gone. This changes the assumption of tax planning from anticipations when reallocation two items “New Regime Old Saws” and “Old Regime New Propositions.” Unlike the older method, where deductions such as Section 80C and HRA could ease one’s tax burden, the new method gets rid of most exemptions in order to simplify tax calculations as much as possible. Yet there is still one lesser known avenue that might help lower your taxable income the National Pension System (NPS).
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What the New Tax Regime Means for Tax saving Options
The new tax regime under Section 115BAC aimed to simplify income tax and lower rates. It also omitted many regular tax breaks that white collar workers used to rely on, such as HRA and other allowances. But although most of these are gone, employees continue to enjoy a certain standard deduction from their taxable incomes and some retirement benefits.
So for salaried taxpayers, NPS under 80CCD represents in this system one of the most effective ways to save tax, because it is still possible to reduce your taxable income by the employer contributions.
How NPS can reduce your taxable income
Employer Contribution Deduction (Section 80CCD(2))
One important feature of the new tax regime is that employer contributions to your National Pension System (NPS) account can be exempt from taxes under Section 80CCD(2) as up to 14% of your basic salary + dearness allowances (DA) is deducted before arriving at what is considered taxable income.
This means that if your employer contributes to your NPS Tier I account as part of your remuneration, that sum is excluded from your taxable income thereby reducing the total tax burden for the year.
By contrast, self contributions made by you would no longer enjoy a deduction in the new regime (Sections 80CCD(1) or 80CCD(1B)). They are deductible only under the old tax law.
Simple Tax Saving Example Using NPS
Here’s how NPS can help save taxes:
- Your employer contributes 14% of your basic salary to your NPS Tier I account.
- This employer contribution is free of tax under Section 80CCD(2).
- So even if you have limited deductions in the new regime, you may still end up paying much less tax than before.
This means NPS is one of the few systematic ways that employees have to save tax, while at the same time building up their retirement fund under the new tax rules.
Other NPS Tax Benefits Worth Knowing
While the new tax regime closes down many tax reliefs, NPS still brings valuable longterm tax benefits:
- Employer Contribution Exemption: Employer contributions are taxfree to the level of 14% of salary according to the new tax system.
- Partial Withdrawal Exemption: Up to 25% of your own contributions can be taken out taxfree depending on specific conditions under Section 10(12B) when certain stages have been reached.
- Benefits on Maturity: Upon retirement or maturity, a portion of the funds in NPS (up to 60%) can be withdrawn free from tax in accordance with regulations (the remainder is normally used to buy an annuity which will give you an income in retirement and is then taxed as such).
We must remember, however, that unlike employer contributions, in the new regime self contributions (Sections 80CCD(1) & 80CCD(1B)) are not deductible. This means only employer contributions offer a reliable tool for reducing taxes under the updated system.
A Choice between the Old vs. New Tax Regime
For some people trying to decide whether to go for an old ITR or the emerging one, NPS can give the deciding factor:
- Under the old tax regime, you can also claim NPS deductions under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) which means larger initial tax breaks (subject to limits).
- In the new tax regime, only the employer’s contribution under Section 80CCD(2) gets you a deduction.
By comparing your overall tax liability under both regimes including available deductions and tax rates you can determine the most beneficial tax strategy. Many salaried taxpayers calculate twice before making the switch.
Final Word NPS as of 2026 is Still One of the Better Tax Tools Available
Although the new tax regime has cut off many deductions favoring only wage earners, NPS is an exception that retains its tax relief to some extent.
By understanding how employer contributions are treated under the new rules, and the role played by long term retirement benefits in tax planning, employees can make informed choices that might lower their tax costs and build up a solid pension pot.
In essence, NPS in 2026 is not purely a retirement vehicle it’s also a strategic tax saving instrument under the new tax regime. Financially astute salaried professionals ought to consider its merits.
