Employer NPS Contribution and Section 80CCD(2)
An employer NPS contribution is money you pay into an employee's National Pension System account as part of their package. Section 80CCD(2) lets the employee deduct that contribution from taxable income, up to 10 percent of salary, meaning Basic plus DA, for a private employer. It is separate from the employee's own NPS deduction.
Most reliefs an Indian employee once relied on have thinned out under the new tax regime. This one held its ground. Because 80CCD(2) survives that regime, an employer NPS contribution is one of the scant levers left that still lowers tax for staff who moved off the old rules. The rest of this page sets out how it works, what qualifies, and how to carry it on an offer letter without overstating anything.
What is Section 80CCD(2), and whose deduction is it?
Start with the ownership of the deduction, because it trips people up. Section 80CCD(2) is the relief tied to the employer's contribution into an employee's NPS account. The money leaves your books, but the deduction is claimed by the employee in their own return. You do not grant the exemption. You structure the pay and run payroll, and the employee takes the benefit when they file.
Keep it apart from the employee's own NPS route. What a person pays into their NPS account from their salary is deducted under 80CCD(1), with the extra slice under 80CCD(1B). Those are the employee's own contributions. 80CCD(2) sits beside them and covers what you, the employer, put in. Two separate ledgers, two separate limits, so the employer route does not nibble away at the employee's own headroom.
For a private company this usually shows up as a defined percentage of Basic that you agree to pay into the employee's pension account, carried inside the cost to company. If you want the wider context of how heads like this hang together, the Indian salary structure guide lays out the whole frame.
How much of the NPS contribution qualifies?
The statutory base is plain. For a private, non government employer the contribution qualifies up to 10 percent of salary, and salary here means Basic plus DA. Most private SMEs do not run a DA line, so in practice the base is often just Basic. Where the employer is the Central Government the figure is 14 percent, not 10.
There is a caveat you should hear before you write a number into anyone's offer. It has been reported that the new regime lifted the private employer limit from 10 to 14 percent under the Finance Act 2024. We could not confirm that 14 percent for private employers on an official page, so this page will not state it as settled. Treat 10 percent as the statutory base you can stand on, note that a higher new regime limit has been reported, and ask your CA to confirm the current percentage before you commit to it.
| Employer | Qualifying limit on the contribution |
|---|---|
| Private, non government | Up to 10 percent of salary, meaning Basic plus DA. A higher new regime limit has been reported. Confirm with your CA. |
| Central Government | 14 percent of salary, meaning Basic plus DA. |
Because the limit rides on Basic plus DA, how you split Basic against the other heads sets the ceiling. A thin Basic means a thin qualifying contribution.
This is one reason the Basic figure on an offer matters beyond take home pay. In Offrd, Basic defaults to 50 percent of cost to company and stays editable, so the base your NPS percentage runs on is easy to see and adjust. If you want to understand what sits inside that headline number first, read what CTC actually means.
Why 80CCD(2) still works under the new tax regime
Here is the part that makes this worth your attention in 2026. The new regime, now the default for most employees, strips out almost every allowance exemption and most Chapter VIA deductions. HRA exemption is gone under it. Section 80D is gone under it. An employee who moved across loses a long list of small reliefs they used to lean on.
80CCD(2) is a deliberate exception. Section 115BAC, which sets up the new regime, removes Chapter VIA deductions other than sub section (2) of section 80CCD. So the employer NPS contribution keeps its relief even for staff on the new rules. That is confirmed, not reported, and it is the whole reason to structure this head with intent.
The practical read is simple. If most of your team has drifted onto the new regime, and they have, then an employer NPS contribution is one of the few things you can add to a package that still cuts their tax. A fixed cash allowance would just be taxable in their hands. This one is not, up to the limit. For staff who prefer more cash today, the tradeoff shows plainly in a CTC versus in hand comparison, and it is worth talking through before you set the percentage.
How to carry an employer NPS contribution on the offer
Mechanically this behaves like any other CTC line. You agree a percentage of Basic, you name it as the employer NPS contribution, and it sits in the cost to company beside Basic, HRA and your provident fund share. The employee sees it on the offer letter and later on the payslip, which keeps the package honest and avoids the awkward gap between a headline CTC and what actually reaches the account.
A few habits keep it clean.
- Fix the percentage against Basic plus DA, and confirm the current qualifying limit with your CA before it goes into an offer.
- Name the head clearly as the employer NPS contribution, so it is not confused with the employee's own NPS deduction.
- Make sure the employee actually holds an NPS account for the money to land in, since the account is theirs to open, not yours.
- Carry the same figure from the offer letter through to the monthly payslip, so the record stays consistent if it is ever queried.
- Leave the tax working and the TDS to your payroll consultant and the employee's return. You structure the pay, they compute the relief.
Offrd builds each of these into the document itself. You can raise the offer through the offer letter generator with the NPS head already named, then let it flow into a monthly payslip without re keying. Setup takes under two minutes, and the same structure carries EPF, ESI, PT and gratuity where they apply.
Where Offrd helps, and where it does not
The boundary matters here, so let us draw it plainly. Offrd documents pay. It sets the employer NPS contribution up as a named salary head, shows it on the offer letter and the payslip, and keeps the figure consistent from the offer through to a full and final settlement. That is the job.
What Offrd does not do is run the pension side or the tax side. It does not open NPS accounts. It does not remit money to the pension fund. It does not compute anyone's 80CCD(2) deduction, tell an employee their taxable income, or produce Form 16 for this purpose. Whether the contribution gives the relief is decided under the Income Tax Act when the employee files, and your CA or payroll consultant handles the TDS and Form 16. Offrd stays on the structuring and documenting side of that line, on purpose.
More than 4,000 companies across 350 plus Indian cities use Offrd to produce this paperwork in minutes.
Pricing starts at 99 rupees a document, or 50 rupees per active employee a month, with 50 free credits on signup and Atndnz attendance bundled at no extra cost. Build the offer, carry the NPS head into the payslip, and keep the numbers straight from hire to exit.
Frequently asked questions
What is Section 80CCD(2)?
Section 80CCD(2) is the deduction for the employer's contribution to an employee's National Pension System account. It is claimed by the employee against that contribution, and it is separate from the employee's own deductions under 80CCD(1) and 80CCD(1B) for what they pay in themselves.
How much of the employer NPS contribution qualifies under 80CCD(2)?
For a private employer the contribution qualifies up to 10 percent of salary, meaning Basic plus DA. Where the employer is the Central Government the figure is 14 percent. It has been reported that the new regime raised the private employer limit from 10 to 14 percent, so confirm the current percentage with your CA before you fix a number.
Does 80CCD(2) survive the new tax regime?
Yes. Section 115BAC removes Chapter VIA deductions other than sub section (2) of section 80CCD. So an employee on the new regime, which most now are, still gets relief on the employer NPS contribution. That is what makes it one of the few reliefs worth structuring in 2026.
Is the employer NPS contribution different from the employee's own NPS deduction?
Yes. The employer contribution runs under 80CCD(2). What the employee pays into their own NPS account runs under 80CCD(1) and 80CCD(1B). They are separate limits, so the employer route does not eat into the employee's own deduction.
Can an employer NPS contribution sit inside CTC?
Yes. It is commonly carried as a line in the cost to company, alongside Basic, HRA and the employer provident fund share. Offrd can show it on the offer letter and the payslip as a named head so the number is visible to the employee from day one.
Does Offrd open NPS accounts or compute the deduction?
No. Offrd documents the contribution as a salary head on the offer letter and payslip. It does not open NPS accounts, remit money to the pension fund, or compute anyone's deduction. The account, the remittance and the tax working sit with the employee, the pension fund and your CA.
Put the NPS head on the offer, cleanly
Offrd names the employer NPS contribution on the offer letter and payslip and carries the same figure through to settlement. Setup takes about two minutes.