Section 80CCD(2) allows employees to claim a deduction for their employer's NPS contribution under both the old and new tax regimes. According to former Principal Commissioner of Income Tax O. P. Yadav, central and state government employees can claim up to 14% of salary under both tax regimes, while other employees (including private sector) can claim up to 10% under the old regime and up to 14% under the new regime. The salary calculation includes basic salary plus dearness allowance (DA), provided DA forms part of retirement benefits. Under the new Income Tax Act 2026, the maximum deduction limit under Section 80C has been increased to ₹2,00,000 per financial year, providing enhanced tax planning opportunities for middle-income earners.
Many taxpayers are surprised when the ITR utility adds employer's NPS contribution to salary before allowing deduction. As reported by former Principal Commissioner O. P. Yadav, Section 17(1)(viii) of the Income Tax Act treats employer's NPS contribution as part of employee's salary, requiring the amount to be first included under salary income before becoming eligible for deduction under Section 80CCD(2). The ITR utility follows this statutory process by asking taxpayers to report the employer's contribution before granting the deduction. According to The Economic Times, this is a common issue as the ITR utility does not allow deduction under Section 80CCD(2) unless the employer's NPS contribution is first included in salary.
The Rs 7.50 lakh limit mentioned in Section 17(2)(vii) applies only when employer's combined annual contribution exceeds this threshold across eligible retirement funds including Recognised Provident Fund (RPF), National Pension System (NPS), and Approved Superannuation Fund. According to the explanation, any contribution above Rs 7.50 lakh is treated as taxable perquisite in the employee's hands. Importantly, this provision does not determine whether employer's NPS contribution forms part of salary, which is governed separately by Section 17(1)(viii).
Section 17(1)(viii) specifies that employer's NPS contribution forms part of employee's salary, while Section 17(2)(vii) deals with taxation of employer contributions exceeding the Rs 7.50 lakh threshold across eligible retirement funds. As explained by the former tax official, these provisions serve different purposes and should be read together rather than viewed as contradictory, since taxable perquisites are also treated as salary under the Income Tax Act. The Income Tax Department's ITR utility follows this sequence by first including employer's NPS contribution in salary under Section 17(1)(viii) before allowing eligible deduction under Section 80CCD(2).
With the July 31 deadline approaching for filing Income Tax Returns (ITR) for Assessment Year 2026-27, taxpayers must ensure employer's NPS contribution is correctly reported in the salary schedule. According to the guidance, once the contribution is included as salary, the eligible deduction under Section 80CCD(2) can be claimed within the prescribed limits. Understanding this sequence can help taxpayers avoid unnecessary confusion and file their ITR accurately before the deadline. The ITR utility follows the prescribed sequence under the Income Tax Act by first including employer's NPS contribution in salary before allowing the deduction.
