Employer NPS in the New Regime: Moving CTC Into Section 124

What sections 124 and 202 actually allow

Section 202(2)(a)(xii) of the Income-tax Act, 2025_Bill.pdf) removes Chapter VIII deductions under the new regime, except sections 124(1), 124(2), 125(2) and 146.

• Section 124(1) allows a deduction for the employer's contribution to your pension account under the notified scheme. The limit is 14% of salary for Central and State Government employers, and 10% for any other employer.
• Section 124(2) substitutes 14% for every employer when you are taxed under section 202(1), the default new regime.

The Income Tax Department's AY 2026-27 page states the same thing for the new regime: "14% of salary" for all categories of employer.

Your own voluntary NPS contribution is a different deduction, section 124(3), and it is not available in the new regime. This article is about the employer's contribution only.

The hypothetical package before restructuring

• Gross salary ₹30,00,000, of which basic is ₹12,00,000 and there is no DA.
• Employer PF is on the ₹25,000 ceiling (₹36,000) and sits outside gross salary.
• New regime, resident individual, no other income.

Moving ₹1,68,000 into employer NPS

14% of ₹12,00,000 basic is ₹1,68,000. With a CTC-neutral restructure, the special allowance falls by ₹1,68,000 and the employer pays the same amount into your NPS account.

The employer's NPS contribution is part of salary income, so the deduction brings it back out. The effect is the same as removing ₹1,68,000 from total income. All of it would otherwise have been taxed at 30%, so the saving is 30% × 1.04 × ₹1,68,000 = ₹52,416.

Now look at your bank account. Cash salary falls by ₹1,68,000 and tax falls by ₹52,416, so annual take-home drops by ₹1,15,584. You have converted ₹1,15,584 of spendable money into ₹1,68,000 of pension balance.

# Synthetic ₹30 lakh package. New regime, tax year 2026-27.
BANDS = [(400000, 0), (800000, .05), (1200000, .10), (1600000, .15),
         (2000000, .20), (2400000, .25), (float("inf"), .30)]

def new_regime_tax(ti):
    t, lo = 0.0, 0
    for hi, r in BANDS:
        if ti > lo:
            t += (min(ti, hi) - lo) * r
        lo = hi
    if ti <= 1200000:
        return 0.0
    return round(min(t, ti - 1200000) * 1.04, 2)

def nps_restructure(gross, basic_plus_da, nps_amount):
    limit = 0.14 * basic_plus_da                      # section 124(2), new regime
    deductible = min(nps_amount, limit)
    before = new_regime_tax(gross - 75000)
    after = new_regime_tax(gross - 75000 - deductible)
    cash_change = -nps_amount + (before - after)
    return {"limit": limit, "tax_saved": before - after, "take_home_change": cash_change}

print(nps_restructure(3000000, 1200000, 168000))
print(nps_restructure(3000000, 1200000, 200000))   # above the limit: excess saves nothing

The second call shows why the basic line matters. A ₹2,00,000 contribution on a ₹12,00,000 basic still only deducts ₹1,68,000. The extra ₹32,000 is locked away with no tax saving at all.

Limits that bite at senior levels

The ₹7,50,000 aggregate cap. Section 17(1)(h) treats employer contributions to recognised PF, NPS under section 124(1) and approved superannuation as a taxable perquisite, to the extent they together exceed ₹7,50,000 in a tax year. In this example the total is ₹36,000 + ₹1,68,000 = ₹2,04,000, which is well clear of the cap. If you also have superannuation and PF on full basic, add them up. The ₹7.5 lakh cap works an example that crosses it.

Lower slabs save less. On a ₹14,00,000 salary, the rupees you move come out of the 15% slab. They save 15.6 paise each, or less if they pull income into the rebate zone. The restructure is worth most to people whose income tops out in the 30% slab.

Partial withdrawal. Schedule III Sl. 4 of the Act excludes a partial NPS withdrawal from income, up to 25% of your own contributions, where the withdrawal follows the PFRDA regulations. We have not restated PFRDA's withdrawal and annuity rules here. Read them before deciding how much to lock in.

Asking for it in an offer negotiation

Frame the request as a change of structure, not as more money. For example: "Could ₹1,68,000 of the special allowance be paid as employer NPS contribution instead? It stays within 14% of basic, and CTC is unchanged." The employer needs an NPS corporate arrangement to do this, and not every employer has one. If yours does not, the option simply does not exist, and asking costs you nothing.

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