The new tax regime strips out almost every deduction salaried employees are used to. HRA, the Section 123 basket, health insurance, professional tax - none of them survive. One does: your employer's contribution to the National Pension System, under Section 124 (formerly Section 80CCD(2)).
That makes it the most interesting line in a modern CTC structure, and one that a lot of employees do not realise they can ask for.
What it is
This is not your own NPS contribution. It is an amount your employer pays into your NPS Tier-I account, forming part of your CTC. Because it is deductible under both regimes, it reduces your taxable salary whichever regime you are on.
Three separate NPS-related deductions exist, and they are constantly confused:
Your own contribution within the Section 123 basket - competes with EPF, PPF and everything else for one Rs. 1,50,000 cap. Old regime only.
Your additional contribution of up to Rs. 50,000 - formerly Section 80CCD(1B), sits outside the basket. Old regime only.
Your employer's contribution under Section 124 - separate from both, and available under both regimes.
The limit
The deduction is capped as a percentage of salary, where salary means Basic plus Dearness Allowance. It is not unlimited, and it is not a flat rupee figure.
The percentage differs by employer type and, since the new regime's introduction, by regime. Because the applicable percentage has been revised more than once in recent years, check the current figure against your own payroll system's configuration or with your finance team before relying on a specific number - this is one of the details most likely to have moved.
The structural point holds regardless of the exact percentage: the higher your Basic, the more room you have. An employee with a Basic of Rs. 4,00,000 has far less headroom than one with a Basic of Rs. 12,00,000 on the same CTC. Salary structures that suppress Basic to reduce gratuity and EPF liability also shrink this deduction.
Why it matters more under the new regime
Under the old regime, employer NPS is one deduction among many. Under the new regime it is essentially the only one, which changes its relative value entirely.
Consider an employee on Rs. 19,00,000 gross under the new regime. Standard Deduction of Rs. 75,000 brings taxable income to Rs. 18,25,000, and the tax is Rs. 1,71,600. Every rupee of employer NPS contribution comes off that Rs. 18,25,000 at the marginal rate - and there is nothing else competing to reduce it.
The catch employees miss
It has to already be part of your gross salary. This trips people up constantly.
If your employer restructures your CTC to route part of your existing package into NPS, your taxable salary falls and the deduction is real. If your employer pays NPS on top of your existing CTC, that is additional cost to them - welcome, but a different conversation.
What does not work is claiming a deduction for an employer contribution that was never included in your gross salary in the first place. The deduction reduces something that was counted; it does not create a benefit out of nothing.
The trade-offs before you ask for it
Lock-in. NPS Tier-I is locked until 60, with limited partial withdrawal for specified purposes. This is retirement money, not accessible savings.
Taxation at exit. A portion of the corpus is tax-free at retirement; the balance must be used to purchase an annuity, and the annuity income is taxable in the year received. The deduction now is a deferral, not an exemption.
Reduced take-home. Routing salary into NPS lowers your monthly cash. For someone servicing a home loan or funding school fees, a tax deduction that reduces liquidity may not be the right trade.
Market exposure. NPS returns depend on your chosen asset allocation. It is not a guaranteed-return product like EPF.
Practical points for payroll teams
Show it separately on the payslip. Employees who see a deduction they did not authorise will raise tickets. A labelled line prevents most of them.
Configure the percentage limit correctly. A system that applies no cap, or the wrong cap, will over-state the deduction and understate TDS - which surfaces as a nasty catch-up in the last quarter of the year.
Recalculate on Basic revisions. Because the cap is a percentage of Basic plus DA, an increment mid-year changes the permissible amount. Systems that compute the limit once in April get it wrong for everyone who got a raise.
Explain it during regime declaration. Employees choosing the new regime often assume they have no deductions at all. Telling them this one survives is a genuinely useful piece of communication.
Model it against your salary
Our Tax Regime Calculator treats employer NPS as a deduction under both regimes, alongside the full old-regime deduction set, so you can see how it changes the comparison for Tax Year 2026-27.
Before restructuring your CTC around this, talk to a chartered accountant. The applicable percentage limit, the interaction with your existing EPF and gratuity entitlements, and the retirement-stage taxation all depend on specifics that a general guide cannot address.