Synopsis: Many taxpayers assume that after exhausting the limits under Section 80C, there is no further scope for tax savings. This article explains why that assumption is incorrect and how the National Pension System (NPS) can help individuals save up to ₹2 lakh or more in additional tax deductions under the Old Tax Regime. It covers the limitations of Section 80C and illustrates how NPS can help in gaining more tax deductions.
Most salaried taxpayers in India believe their tax-saving journey ends once they exhaust Section 80C’s ₹1.5 lakh limit through EPF, ELSS, LIC etc, But this is a misunderstanding, as more money (Tax) can be saved legitimately and legally using the deductions under the National Pension System (NPS). A taxpayer individual can save over ₹2 lakh additionally under NPS
Why is Section 80C not enough?
Under the Old Tax Regime, a salaried taxpayer can save up to ₹1.5 lakh using the deductions claimable under Section 80C. For salaried employees under the tax bracket of 20% or 30%, this cap is too low. Often, employees exhaust this limit just from their PPF contribution. This makes deductions from Section 80C inadequate.
What is NPS?
The National Pension System is a long-term savings scheme introduced by the Government of India to promote retirement savings. It is regulated by the Pension Fund Regulatory and Development Authority. It is a widely accessible retirement planning tool, available to salaried employees, self-employed individuals, and private sector workers.
Tax Saving Breakdown using NPS
While using Section 80CCD(1), salaried individuals can claim up to 10% of their salary, including Dearness Allowance (DA), and self-employed individuals can claim up to 20% of Employee contribution to NPS but this comes within the overall ₹ 1.5 lakh limit of Section 80C.
But to save more, NPS provides two distinct tax deductions, separate from the Section 80C.
- Section 80CCD(1B): Under this section, an additional deduction of up to ₹ 50,000 can be claimed. This excludes the ₹1.5 lakh limit provided under Section 80C.
- Section 80CCD(2): This section covers the employer’s contribution to NPS. The employers can contribute up to 10% of the employee’s salary or 14% of the employee’s salary if they are a government employee.
Both Section 80CCD(1B) and Section 80CCD(2) are separate from Section 80C, and hence, these deductions allow one to gain additional tax benefits. Furthermore, Section 80CCD(2) does not have any monetary limit, and it is only available to salaried employees.
For an instance if a salaried employee has an annual salary of ₹12 lakh, including DA. Under the Old Tax Regime, their tax slab would be 30%, and Section 80C is fully utilised using PPF, ELSS, and LIC, etc. Additionally, the employee’s can claim ₹50,000 in NPS self-contribution and ₹1,20,000 in NPS employer’s contribution.
Here, the total additional savings beyond the Section 80C would be ₹1,70,000, and the total savings including Section 80C would be ₹3,20,000.
Tax Saving Potential Table
| Particulars | Amount | Section |
| PPF, ELSS, LIC, etc | ₹1,50,000 | 80C |
| NPS Self-Contribution | ₹50,000 | 80CCD(1B) |
| Employer’s NPS Contribution | ₹1,20,000 | 80CCD(2) |
| Total Tax Deduction (Saved) | ₹3,20,000 | |
Also read: Income Tax Slabs FY 2025–26 Explained: How Much Tax Will You Pay Under New Regime?
Who Should Invest in NPS
- Salaried employees who come under the 20% or 30% tax slab, who want to further reduce their taxable income.
- Individuals who have exhausted their Section 80C and need additional options to save tax.
- Professionals with employers who offer an NPS contribution facility.
- Taxpayers looking for disciplined, long-term investment options focusing on retirement savings.
Conclusion
Section 80C should not be the end of your tax planning. For salaried taxpayers in higher tax brackets, the National Pension System offers a smart way to unlock additional tax savings beyond the standard limits. With benefits available through both self and employer contributions, NPS allows you to reduce your tax burden today while building a secure retirement for the future.
FAQs
No. NPS is voluntary for most salaried employees. However, some employers may offer it as part of the salary structure.
Yes. Self-employed individuals can claim deductions under Section 80CCD(1) and Section 80CCD(1B). However, Section 80CCD(2) is not available to self-employed individuals.
No. Tax benefits for NPS contributions are available only under the Old Tax Regime. Under the New Tax Regime, deductions under Sections 80C and 80CCD(1B) are not allowed.
Written by Nila Maria Jacob
