Contents
- Introduction: Navigating the New Tax Regime
- Deductions: What's In and What's Out in the New Regime (FY 2025-26)
- Taxation of Employer Contributions to EPF and Superannuation Funds
- NPS Benefits and Tax Treatment in the New Regime
- The All-Important Combined Cap on Employer Contributions
- Can You Contribute to Both EPF and NPS?
- Achieving a Tax-Free Salary Up to ₹13.7 Lakh in the New Regime
- Frequently Asked Questions
- Conclusion
Introduction: Navigating the New Tax Regime
The new income tax regime, now the default option for taxpayers in India, continues to evolve. For the Financial Year 2025-26 (Assessment Year 2026-2027), understanding how your employer's contributions to crucial retirement savings instruments like the Employees' Provident Fund (EPF), National Pension System (NPS), and Superannuation Funds are taxed is crucial for effective financial planning.
The new tax regime balances lower tax rates with fewer traditional deductions, making it essential to understand which retirement-related benefits remain and which common deductions are no longer available.
This post breaks down the tax implications of these employer contributions and provides a comprehensive overview of which common deductions and exemptions are allowed and not allowed in the new regime, helping you make informed decisions about your tax planning.
Deductions: What's In and What's Out in the New Regime (FY 2025-26)
The new tax regime simplifies taxation by significantly reducing the number of available deductions and exemptions compared to the old regime. This table provides a comprehensive look at the treatment of common deductions under the new tax regime for FY 2025-26:
| Deduction/Exemption | Relevant Section | Allowed in New Regime (FY 2025-26)? | Notes |
|---|---|---|---|
| Standard Deduction (for Salaried/Pensioners) | Yes | Available as a deduction of ₹75,000 from salary/pension income. | |
| Employer's Contribution to NPS | Section 80CCD(2) | Yes | Deductible up to 14% of Basic Salary + DA for all employees. |
| Your Own Contribution to NPS | Section 80CCD(1), 80CCD(1B) | No | Deductions under these sections are generally not allowed in the new regime. |
| Investments (e.g., PPF, ELSS, LIC Premium, NSC, principal on home loan repayment, etc.) | Section 80C | No | The aggregate deduction limit of ₹1.5 Lakh under Section 80C, 80CCC, 80CCD(1) is not available. |
| Health Insurance Premium | Section 80D | No | Deduction for health insurance premiums is generally not allowed. |
| Interest on Housing Loan (for Self-Occupied Property) | Section 24(b) | No | Deduction for interest on a home loan for a self-occupied property is not allowed. |
| Interest on Housing Loan (for Let-Out Property) | Section 24(b) | Yes (as set-off) | Loss from interest on a loan for a let-out property can be set off against rental income (subject to limits). |
| Children Education Allowance Exemption | No | Specific exemption for children's education allowance is not available. | |
| Leave Travel Allowance (LTA) Exemption | No | Exemption for LTA is not available. | |
| House Rent Allowance (HRA) Exemption | No | Exemption for HRA is not available. | |
| Professional Tax Deduction | Section 16(iii) | No | Deduction for professional tax paid is not allowed. |
| Donations to Charities | Section 80G | No | Deduction for donations is generally not allowed. |
| Interest on Savings Account | Section 80TTA, 80TTB | No | Deduction for interest from savings accounts or fixed deposits (for senior citizens) is not allowed. |
This table covers common deductions. There might be a few specific deductions or exemptions available under certain circumstances (e.g., for specific allowances, deductions related to business income), but the list above covers the most widely claimed ones by salaried individuals.
Taxation of Employer Contributions to EPF and Superannuation Funds
While your own contributions to retirement funds like EPF often lose their deductibility in the new tax regime (unlike the old regime), the tax treatment of your employer's contribution is handled differently.
For a Recognized Provident Fund (like EPF), the employer's contribution is tax-exempt up to 12% of your basic salary plus dearness allowance (DA). If the employer's contribution exceeds this 12% limit in a financial year, the excess amount is treated as a perquisite and becomes taxable in your hands under the head "Salaries". The interest earned on this excess contribution is also subject to tax.
Similarly, contributions made by your employer to a Recognized Superannuation Fund are also considered when calculating the aggregate limit for tax exemption, as detailed in a later section.
A Recognized Superannuation Fund is a retirement fund established by an employer for employees and approved by the tax authorities, providing benefits typically as a pension or annuity upon retirement.
NPS Benefits and Tax Treatment in the New Regime
The National Pension System (NPS) is another crucial retirement savings vehicle. Under the new tax regime for FY 2025-26, NPS offers a notable tax advantage concerning employer contributions.
NPS Tax Benefits for Salaried Individuals in the New Regime (FY 2025-26):- Employer's Contribution Deduction (Section 80CCD(2)): This is a key benefit. The contribution made by your employer to your NPS account is deductible from your taxable income up to 14% of your basic salary plus dearness allowance (DA). This enhanced limit applies equally to both Central Government employees and employees in other sectors, including the private sector. This deduction is available over and above the limits traditionally associated with Section 80C.
- Employee's Own Contribution: Unlike the old regime, your voluntary contributions to your NPS account (covered under Sections 80CCD(1) and the additional deduction under 80CCD(1B)) are generally not deductible if you opt for the new tax regime.
-
Withdrawal Taxation:
- Partial Withdrawals: Up to 25% of your own contributions are permitted for specified purposes (like children's education/marriage, buying/constructing a house, critical illness) after a minimum of 3 years. These partial withdrawals are tax-exempt.
- Lump Sum at Retirement (Age 60/Superannuation): Up to 60% of the accumulated NPS corpus can be withdrawn as a lump sum at retirement. This 60% portion is entirely tax-free.
- Annuity Purchase: At least 40% of the corpus must be used to purchase an annuity plan from an Annuity Service Provider (ASP). The amount used to buy the annuity is tax-exempt at that point, but the pension you receive later is taxable based on your income tax slab.
- On Death: If the subscriber passes away, the entire accumulated corpus is paid to the nominee or legal heir and is tax-exempt.
- Voluntary Participation: Available to Indian citizens (including private sector employees) aged 18-70.
- Flexible Investment Options: Choose between 'Active Choice' (decide asset allocation across Equity, Corporate Bonds, Govt Securities, Alternative Assets) and 'Auto Choice' (age-based automatic allocation). You can change your fund manager and asset allocation periodically.
- Low Cost Structure: Generally has lower fund management charges compared to many other investment products, contributing to a larger corpus over time.
- Portability: Your unique Permanent Retirement Account Number (PRAN) and account remain unchanged regardless of job changes or geographical relocation.
- Regulated and Transparent: Overseen by the PFRDA, ensuring oversight and transparency.
- Tier I and Tier II Accounts: Tier I is the primary, restricted withdrawal account. Tier II is an optional, more liquid account (though contributions generally don't offer tax benefits for private employees).
Basic + DA (Basic Salary plus Dearness Allowance) is a common component of salary used as the base for calculating contributions and limits in many retirement schemes like EPF and NPS.
The All-Important Combined Cap on Employer Contributions
To rationalize the tax benefits on employer contributions to various retirement funds, the Income Tax Act includes a critical aggregate limit. For FY 2025-26, if the **total employer contribution** during the financial year to your:
- Recognized Provident Fund (EPF)
- Recognized Superannuation Fund
- National Pension System (NPS)
...collectively exceeds **₹7.5 Lakh**, the amount contributed above this threshold is treated as a perquisite and is taxable in your hands. This is specifically covered under Section 17(2)(vii) of the Income Tax Act, read with Rule 3B of the Income Tax Rules, which provides the method for valuing this perquisite.
Furthermore, any income (like interest or dividends) that accrues during the year on this *taxable* excess contribution is also considered income from salary and taxed accordingly.
| Retirement Account Type | Employer Contribution Tax Treatment (New Regime FY 2025-26) | Aggregate Cap Consideration |
|---|---|---|
| Recognized Provident Fund (EPF) | Exempt up to 12% of Basic + DA. Taxable above 12%. | Included in the ₹7.5 Lakh aggregate cap. |
| Recognized Superannuation Fund | Generally tax-exempt up to certain limits, but contributions are... | Included in the ₹7.5 Lakh aggregate cap. |
| National Pension System (NPS) | Deductible up to 14% of Basic + DA (for all employees) under Section 80CCD(2). | Included in the ₹7.5 Lakh aggregate cap. |
| TOTAL Employer Contribution (EPF + Superannuation + NPS) | Taxable above **₹7.5 Lakh** per financial year. |
This ₹7.5 Lakh limit is particularly relevant for high-salaried individuals where significant contributions are made by the employer to multiple retirement avenues. Ensure you consider this cap when planning your salary structure or choosing between retirement savings options.
Can You Contribute to Both EPF and NPS?
Yes, absolutely. There is no legal restriction preventing an individual from being a member of and contributing to both the Employees' Provident Fund (EPF) and the National Pension System (NPS) simultaneously.
EPF is often a mandatory contribution for salaried employees based on their employment terms, while NPS is a voluntary scheme open to all Indian citizens, including those already contributing to EPF. Many individuals, especially in the private sector, choose to contribute to NPS over and above their mandatory EPF contributions to diversify their retirement savings or to utilize the tax benefits offered on employer's NPS contributions.
Achieving a Tax-Free Salary Up to ₹13.7 Lakh in the New Regime
One of the significant highlights of the new tax regime for FY 2025-26 is the potential for salaried individuals to have a considerable amount of their income become tax-free.
Here's how it works:
- The new tax slabs and the tax rebate under Section 87A ensure that a person with a **net taxable income** of up to **₹12 Lakh** pays zero income tax.
- For salaried employees, a **Standard Deduction of ₹75,000** is available under the new regime. This effectively makes a gross salary of up to ₹12 Lakh (rebate limit) + ₹75,000 (Standard Deduction) = ₹12.75 Lakh tax-free, assuming no other deductions were claimed.
- By strategically utilizing the deduction available for **Employer's contribution to NPS** (up to 14% of Basic + DA under Section 80CCD(2)), you can further reduce your taxable income.
In a scenario where your salary structure is optimized to include a significant employer NPS contribution (e.g., 14% of a substantial Basic + DA component), your gross salary can be higher than ₹12.75 Lakh, yet your net taxable income after the standard deduction and employer NPS deduction could fall below or equal to ₹12 Lakh, resulting in zero tax liability due to the rebate.
According to analyses, a salaried individual can potentially earn a gross salary of up to approximately **₹13.7 Lakh** in FY 2025-26 and pay no income tax under the new regime by effectively claiming the standard deduction and the deduction for employer NPS contribution. This requires a salary structure where the Basic + DA component is sufficient to allow for a 14% employer NPS contribution that, when combined with the ₹75,000 standard deduction, reduces the gross salary to a net taxable income of ₹12 Lakh or less.
Frequently Asked Questions
Is my own contribution to EPF deductible in the new tax regime?
No, employee's own contributions to EPF are generally not deductible under Section 80C in the new tax regime for FY 2025-26. Tax benefits on your own contributions are primarily available in the old tax regime.
Is NPS mandatory for private sector employees?
No, NPS is voluntary for private sector employees. It is mandatory only for new recruits (excluding armed forces) joining the Central Government service on or after January 1, 2004.
What happens if the aggregate employer contribution to retirement funds exceeds ₹7.5 Lakh?
If the combined employer contribution to EPF, NPS, and Superannuation exceeds ₹7.5 Lakh in a financial year, the excess amount is added to your salary income and is taxable as a perquisite.
Are withdrawals from NPS taxable in the new regime?
Partial withdrawals (up to 25% of own contributions for specified reasons) are tax-exempt. At retirement, up to 60% of the corpus withdrawn as a lump sum is tax-free. The pension received from the mandatory annuity purchase is taxable.
Does the ₹13.7 Lakh tax-free salary limit apply to everyone?
The potential to achieve a tax-free salary up to ₹13.7 Lakh applies specifically to salaried individuals in the new tax regime for FY 2025-26. It is enabled by the ₹12 Lakh rebate limit on net taxable income, the ₹75,000 standard deduction, and the effective utilization of the deduction on employer's NPS contribution. The actual tax-free limit can vary based on individual salary structure and components.
Is the interest earned on EPF taxable in the new regime?
Interest earned on your own and employer's contributions to EPF is tax-exempt up to a certain limit. However, interest earned on the portion of the employer's contribution that is taxable (i.e., exceeding 12% of Basic+DA or contributing to the aggregate ₹7.5 Lakh cap) is also taxable.
Conclusion
For salaried individuals navigating the new tax regime in FY 2025-26, understanding the tax treatment of employer contributions to EPF, NPS, and Superannuation funds is paramount. While the rules differ from the old regime, key benefits like the standard deduction and the deduction for employer's NPS contribution remain. Be mindful of the ₹7.5 Lakh combined cap on aggregate employer contributions to avoid unexpected tax liability. By leveraging the available deductions and the tax rebate under Section 87A, it is possible to structure your finances to achieve a zero tax burden on a significant portion of your salary, potentially up to ₹13.7 Lakh. Consulting a tax professional for personalized advice based on your specific income and investments is always recommended for optimal tax planning.