Quick answer
NPS gives you tax relief in three places: when you put money in, when you take a lump sum out at 60, and — only in one case — never. The lump sum at retirement is tax-free only up to 60% of your corpus, even though the pension regulator now lets non-government subscribers take up to 80% as a lump sum. The extra 20% is taxable at your slab rate. Pension from the annuity is taxable every year you receive it. If you are in the new tax regime, only your employer’s NPS contribution still gives you a deduction.
Answer first: NPS tax benefits in FY 2026-27 are: an own-contribution deduction under Section 124 (old Section 80CCD) of up to ₹1.5 lakh within the old-regime limit plus an extra ₹50,000 under Section 124(1B), an employer-contribution deduction of up to 14% of basic plus DA in the new regime (10% in the old regime for private-sector staff), a tax-free lump sum of up to 60% of the corpus at 60, and taxable annuity pension thereafter.
What NPS is, in plain words
The National Pension System (NPS) is a market-linked retirement account run under the Pension Fund Regulatory and Development Authority (PFRDA). You put money in during your working years. It is invested in equity, corporate debt and government securities, based on the scheme you pick. At 60, you take part of the corpus as a lump sum and use the rest to buy an annuity — a product that pays you a monthly pension.
NPS has two accounts. Tier 1 is the main retirement account. It carries all the tax benefits and stays locked till 60, apart from limited partial withdrawals. Tier 2 is a voluntary savings account you can open only if Tier 1 is active. You can take money out of Tier 2 at any time, but for most private-sector subscribers it gives no tax deduction. Treat Tier 2 as a flexible investment account, not as a tax-saving tool.
How much tax do you save while contributing?
Is NPS tax benefit available in the new tax regime?
Only one NPS deduction survives in the new tax regime: your employer’s contribution. The new regime is now the default, and it does not allow the own-contribution deductions under Section 124(1) and 124(1B). If you are salaried and your employer puts money into your NPS, that part still reduces your taxable income in both regimes.
In the old regime, all three deductions are open to you:
| Deduction | What it covers | Limit | Regime |
|---|---|---|---|
| Section 124(1) — old Section 80CCD(1) | Your own Tier 1 contribution | 10% of basic salary plus DA for salaried staff, 20% of gross income for self-employed people, within the overall ₹1.5 lakh limit shared with Section 123 (old Section 80C) | Old only |
| Section 124(1B) — old Section 80CCD(1B) | Extra own Tier 1 contribution | ₹50,000 extra, over and above the ₹1.5 lakh limit | Old only |
| Section 124(2) — old Section 80CCD(2) | Your employer’s contribution | 14% of basic plus DA in the new regime; 10% in the old regime for private-sector staff (14% for central government staff) | Both regimes |
The ₹50,000 extra deduction is the one benefit no other instrument offers. PPF, ELSS and NSC all sit inside the ₹1.5 lakh limit. NPS alone lets you go ₹50,000 beyond it, in the old regime.
A worked example
Take a salaried employee with basic plus DA of ₹60,000 a month, or ₹7.2 lakh a year, in the 30% slab.
- Own contribution of ₹50,000 claimed under Section 124(1B) saves ₹15,000 in tax, or ₹15,600 with the 4% health and education cess.
- Employer contribution at 14% of basic plus DA is ₹1,00,800 a year. In the new regime, that deduction alone saves about ₹31,450 at the 30% rate with cess.
- Together, in the old regime, the two deductions can cut the tax bill by roughly ₹47,000 in a year.
Your exact saving depends on your slab and on how much of the ₹1.5 lakh limit you have already used elsewhere. If your Section 123 limit is already full with PPF and ELSS, the ₹50,000 NPS extra is still open to you.
What about returns during the accumulation years?
Returns inside NPS are not taxed year by year. You pay no tax on the growth while the money stays in the account. Tax enters the picture only at exit, and only on the parts described below. That is why NPS is often called an EET product — exempt when you contribute (through deductions), exempt on the lump sum up to the limit, and taxed on the pension you draw.
What changed in December 2025: the 80% lump sum rule
This is the change most older guides still get wrong. Under the PFRDA (Exits and Withdrawals under NPS) Amendment Regulations notified on 16 December 2025, a non-government subscriber exiting at 60 can now take up to 80% of the corpus as a lump sum, with at least 20% going into an annuity. The old split was 60% lump sum and 40% annuity. Government-sector subscribers generally stay on the older 60% lump sum and 40% annuity split.
The corpus size also changes what is possible, as reported from the new PFRDA schedule:
- Corpus up to ₹8 lakh: the whole amount can be taken as a lump sum, with no annuity needed.
- Corpus between ₹8 lakh and ₹12 lakh: up to ₹6 lakh as a lump sum, with the rest drawn through permitted periodic payouts over at least six years.
- Corpus above ₹12 lakh: up to 80% as a lump sum, at least 20% into an annuity.
Can I withdraw 80% of my NPS at 60 now?
Yes, if you are a non-government subscriber — but do not assume the full 80% is tax-free. That is the trap in the new rule. The pension regulator decides how much you may take as a lump sum. The Income Tax Act decides how much of it is exempt. The tax exemption still covers only up to 60% of the total corpus. If you take the full 80%, the extra 20% is taxable at your slab rate in the year you receive it.
A ₹50 lakh corpus makes the point clear:
- Up to ₹40 lakh (80%) can be taken as a lump sum under the new PFRDA rule.
- Only ₹30 lakh (60%) of it is tax-free.
- The remaining ₹10 lakh is taxable at your slab rate.
- The other ₹10 lakh (20%) buys an annuity, and the pension from it is taxable each year.
If you want zero tax on the lump sum, take 60%, not 80%, and put 40% into the annuity. The 80% option gives you more cash in hand at 60 and a smaller monthly pension later. Which one suits you depends on whether you need cash now or steady income later. Check the tax position before you sign the exit form, because the choice is hard to undo.
Is NPS maturity amount fully tax-free?
No. Only part of it is. The lump sum up to 60% of the corpus is tax-free at normal exit. The annuity purchase itself is not taxed at the time you buy it. But every pension payment you receive from that annuity is added to your income and taxed at your slab rate in the year you receive it. NPS is not a fully tax-free product like PPF. It is tax-free on the way in (through deductions) and on the lump sum up to the limit, and taxed on the pension.
Partial withdrawals before 60
Tier 1 is not fully sealed before 60. After three years in the scheme, you can make a partial withdrawal of up to 25% of your own contributions, for specified reasons such as higher education, marriage, serious illness or building a house. You can do this at most three times in total. Withdrawals against employer contributions or returns are not allowed. Partial withdrawals are tax-free.
A full early exit before 60 is a different matter. You can take only up to 20% of the corpus as a lump sum, and at least 80% must go into an annuity. The lump sum part is exempt, and the pension from the annuity is taxable. Because most of the corpus gets locked into a pension, treat Tier 1 as money you will not touch till 60.
Is NPS Tier 2 withdrawal taxable?
Yes, for most people. Tier 2 has no lock-in, so you can withdraw at any time, but the withdrawal is taxed like any other market-linked investment gain, based on how the money was invested and how long it stayed in. There is one exception: central government employees who put ₹1.5 lakh in Tier 2 with a three-year lock-in can claim a deduction under the old Section 80C rules. For private-sector subscribers, Tier 2 gives no deduction and no special tax treatment on withdrawal.
What happens to NPS when the subscriber dies?
On the death of the subscriber, the entire accumulated corpus is paid to the nominee or legal heir, and the lump sum paid to the nominee is exempt from tax. This is one of the cleanest parts of NPS: unlike a normal exit, there is no forced annuity split for the nominee. Make sure your nomination in the NPS account is current, because an outdated nominee causes delays for your family.
NPS vs PPF vs EPF on tax: the short comparison
- PPF: Deduction under Section 123, interest tax-free, maturity fully tax-free. The cleanest tax deal of the three, but with a ₹1.5 lakh yearly deposit cap and a 15-year horizon.
- EPF: Employee contribution and interest have their own exemptions, and withdrawal after five years of continuous service is tax-free. Our guide on EPF withdrawal tax and the 5-year rule covers the details.
- NPS: The only one of the three with a ₹50,000 extra deduction and an employer-contribution deduction that works in the new regime — but the pension is taxable, so the tax saving at the end is smaller than PPF’s.
If you are choosing between them for tax saving alone, PPF wins on exit tax. If your employer offers NPS contributions, NPS wins on the way in, because the employer part costs you nothing and still cuts your tax in the new regime.
Practical steps before you invest or exit
- Check your regime first. In the new regime, only the employer contribution helps. Do not buy NPS for the ₹50,000 extra deduction unless you are in the old regime or plan to switch to it.
- Claim the employer part even in the new regime. If your employer offers NPS, opt in. It is the one deduction that works in both regimes, up to 14% of basic plus DA.
- At exit, decide 60% vs 80% on paper first. Work out the tax on the extra 20% before you choose the larger lump sum. A bigger lump sum now means a smaller pension and a tax bill in the exit year.
- Keep the nomination current. Your family gets the full corpus tax-free on death, but only if the nominee record is in order.
- Do not count Tier 2 as tax saving. Use it only as a flexible investment account.
Frequently asked questions
Is NPS maturity amount fully tax-free?
No. Up to 60% of the corpus taken as a lump sum at 60 is tax-free. The annuity purchase is not taxed when you buy it, but the pension you receive from it is taxable at your slab rate each year. So part of the maturity value is tax-free and part of it — the pension — is taxed over time.
Can I withdraw 80% of my NPS at 60 now?
If you are a non-government subscriber, yes, under the PFRDA rules notified in December 2025. At least 20% must still go into an annuity. But only 60% of the corpus is exempt from tax, so the extra 20% you take as a lump sum is taxable at your slab rate. Government-sector subscribers generally remain on the 60% lump sum and 40% annuity split.
Is NPS tax benefit available in the new tax regime?
Only the employer-contribution deduction, under Section 124(2) (old Section 80CCD(2)), up to 14% of basic plus DA. Your own-contribution deductions under Section 124(1) and 124(1B) work only in the old regime. If you are in the new regime and have no employer contribution, NPS gives you no deduction at all.
Is partial withdrawal from NPS tax-free?
Yes. A partial withdrawal of up to 25% of your own contributions, made after three years in the scheme and for a specified reason, is tax-free. You can make such withdrawals at most three times. You cannot withdraw against employer contributions or against the returns on your money.
Is NPS Tier 2 withdrawal taxable?
Yes, for most subscribers. Tier 2 withdrawals are taxed as investment gains, based on the asset mix and holding period. Tier 2 gives no deduction for private-sector subscribers. The exception is central government employees who invest ₹1.5 lakh in Tier 2 with a three-year lock-in and claim it under the old Section 80C rules.
What happens to NPS when the subscriber dies?
The entire corpus is paid to the nominee or legal heir, and the lump sum paid to the nominee is exempt from tax. There is no forced annuity purchase for the nominee. Keep your nomination updated so your family is not delayed by paperwork at a hard time.
Official sources
- Income Tax Department portal — deductions, return filing and official guidance: https://www.incometax.gov.in/
- Central Board of Direct Taxes (CBDT) — circulars and notifications: https://www.incometaxindia.gov.in/
- Pension Fund Regulatory and Development Authority (PFRDA) — NPS exit and withdrawal regulations: https://www.pfrda.org.in/
Related guides on this site: New Tax Regime Slabs FY 2026-27 (Section 202), 80C is Now Section 123: What Changed, EPF Withdrawal Tax: 5-Year Rule and TDS, Sukanya Samriddhi Yojana Tax Benefits.
Reviewed by Asuthod Rathod, CA. Last updated: 31 October 2026.
Disclaimer: This article explains tax rules in simple words for general information. Tax laws and PFRDA regulations change from time to time. Check the official portals linked above or speak to a qualified tax professional before acting on anything here.
Editorial byline for eircicai tax saving guides — covering 80C investments, ELSS, PPF, NPS, and regime comparison. Content is reviewed by Asuthod Rathod, CA.