Simply depositing money into India’s National Pension System does not activate the employer-linked deduction examined here. The key question is whether your employer contributes through payroll and which percentage ceiling applies.
That distinction matters after Business Today’s discussion of tax-smart investing listed NPS among several assets while warning that tax savings alone may not support long-term goals.
How the employer-linked deduction works
The Income Tax Department’s March 2026 deductions guidance says an employer’s NPS contribution is included in salary income. A deduction from gross total income is then allowed for the lower of the actual employer contribution or the applicable percentage of salary.
The official table lists a ceiling of 14% of salary for Central or State government employees and 10% for other employees. Its footnote says 14% applies when the employee’s income is chargeable under Section 115BAC 1A, the new tax regime. Because the table combines employee-category and tax-regime qualifications, investors should confirm the percentage used by payroll rather than assume every NPS deposit qualifies for 14%.
For this calculation, salary includes dearness allowance when the employment terms provide for it, but excludes other allowances and perquisites.
What the percentages mean in rupees
Assume the defined salary base is ₹10,00,000:
- At 10%, the deduction ceiling is ₹1,00,000.
- At 14%, the deduction ceiling is ₹1,40,000.
- If the employer actually contributes ₹90,000, the lower-of calculation produces a ₹90,000 deduction under either ceiling.
The ₹1,00,000 or ₹1,40,000 figure is only a ceiling. It is not an entitlement to that employer contribution and it is not the amount of tax saved. The eventual tax effect depends on the taxpayer’s circumstances.
An employee’s own NPS deposit is a different contribution route and is not part of this calculation. Before estimating the employer-linked deduction, check whether payroll offers an NPS contribution, the amount actually contributed and the salary base it uses.
This article is educational and does not provide personalised tax or investment advice.
Source: Business Today
Not financial advice. This article is for educational purposes. Consider your own situation or speak with a licensed advisor before making financial decisions.
