National Pension System (NPS) Contributions

National Pension System (NPS) contributions are the amounts paid into a subscriber’s Permanent Retirement Account Number (PRAN) under India’s government-backed, defined-contribution pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Contributions can come from the employee, from the employer as part of the salary structure, or directly from a self-employed individual. The money is invested by PFRDA-registered pension funds across equity, corporate debt and government securities, and the accumulated corpus is later split between a lump-sum withdrawal and a compulsory annuity that pays a lifelong pension.

Unlike Provident Fund, NPS is voluntary for private-sector employers in India. It is mandatory for central government employees who joined on or after 1 January 2004, and for most state government employees under equivalent notifications. Private employers offer it under the Corporate Model, registering with a Point of Presence (PoP) and routing contributions through a Central Recordkeeping Agency (CRA).

Who contributes, and how much

NPS contributions fall into three categories, and payroll teams need to treat each one differently.

Employee contribution. The subscriber’s own money, deducted through the payroll run. There is no statutory percentage for private-sector employees – it is whatever the employee elects, subject to PFRDA minimums. For central government employees the mandatory rate is 10% of basic pay plus dearness allowance.

Employer contribution. The company’s share, structured into CTC. Because it attracts a separate deduction under Section 80CCD(2) that survives even under the new tax regime, employer NPS has become one of the most tax-efficient components an Indian payroll team can build into a salary structure. Getting that structure right is a design decision that belongs in a broader India payroll strategy rather than something bolted on at year-end.

Voluntary or self-employed contribution. Any Indian citizen or NRI aged 18 to 70 can contribute directly through the eNPS portal or a PoP, independent of an employer. Self-employed subscribers claim deductions on their own contributions rather than through payroll.

Tier I and Tier II contributions

Every NPS subscriber must open a Tier I account first. It is the retirement account proper: contributions attract tax deduction, and the corpus is locked in until age 60 apart from limited partial withdrawals. Registration requires a minimum of ₹500, each subsequent contribution must be at least ₹500, and the account needs at least ₹1,000 in total across each financial year to stay active. There is no upper limit on how much can go in, and no restriction on how many times a subscriber contributes.

Tier II is an optional savings add-on that can only be opened once a Tier I account is active. It requires ₹1,000 to open and ₹250 per subsequent contribution, but carries no annual minimum and no lock-in – money can be withdrawn at any time. In exchange, contributions to Tier II carry no tax deduction for the general subscriber, and PFRDA does not permit employer or any other third-party contributions into a Tier II account. The money must come from the subscriber’s own bank account.

One practical consequence for payroll: an employee who joins late in the financial year and contributes less than ₹1,000 will see the Tier I account frozen. Reactivation means paying the shortfall plus a nominal charge through the CRA portal – a small sum, but a recurring irritant, and a frozen PRAN will also reject the employer’s contribution upload.

Tax treatment of NPS contributions

Most of the confusion around NPS sits in Section 80CCD, whose three sub-sections behave very differently depending on which tax regime the employee has chosen.

Section 80CCD(1) covers the employee’s own contribution, capped at 10% of salary (or 20% of gross total income for the self-employed) and sitting inside the combined ₹1.5 lakh Section 80C ceiling. It is available under the old regime only.

Section 80CCD(1B) allows an additional ₹50,000 for Tier I contributions, over and above the ₹1.5 lakh ceiling. This is the provision no other Indian tax-saving instrument offers – and it too is available under the old regime only.

Section 80CCD(2) covers the employer’s contribution and is the one that matters most now. It is capped at 14% of basic plus dearness allowance under the new regime for both government and private-sector employees, and at 10% under the old regime for private-sector employers. It does not share the ₹1.5 lakh ceiling.

Three practical consequences follow:

• Under the new tax regime, employer NPS is effectively the only meaningful salary-linked deduction left. For an employee on ₹15 lakh basic in the 30% bracket, routing the full 14% into employer NPS shelters roughly ₹2.1 lakh of income.
• “Salary” means basic pay plus dearness allowance forming part of retirement benefits – not gross CTC. Payroll engines that compute the 80CCD(2) cap on the wrong wage base are a common audit finding.
• The ₹7.5 lakh aggregate perquisite cap still applies. Employer contributions to recognised PF, approved superannuation and NPS combined that exceed ₹7.5 lakh in a financial year become taxable as a perquisite in the employee’s hands, together with the annual accretion on the excess. Senior employees with generous employer NPS can cross that line without anyone noticing until Form 16 is issued.

Two related developments are worth tracking. Contributions to NPS Vatsalya accounts opened for up to two minor children became eligible under Section 80CCD(1B) from FY 2025-26. And the Unified Pension Scheme (UPS), available to central government employees from 1 April 2025, has been extended the same tax treatment as NPS. Separately, the Income Tax Act, 2025 renumbers these provisions from 1 April 2026, so any internal payroll documentation still referencing “80CCD(1B)” will need updating to the new section references.

Rates and limits above reflect the position as of FY 2026-27. Confirm current thresholds against PFRDA and CBDT notifications before applying them to a live payroll run.

How NPS contributions flow through payroll

For an employer running the Corporate Model, the monthly cycle looks like this:

• Registration. The company registers with a PoP and receives a Corporate Registration Number. Each employee is issued a PRAN, which is portable across employers and locations.
• Enrolment and election. The employee confirms participation and, where the scheme permits, elects a contribution percentage. Payroll records the PRAN against the employee master.
• Deduction. The employee share is deducted in the payroll run; the employer share is computed on basic plus DA, subject to the 10% or 14% cap that applies under 80CCD(2).
• Contribution file upload. Payroll generates and uploads a Subscriber Contribution File to the CRA – Protean, KFintech or CAMS – and remits funds to the trustee bank. Units are allotted at the NAV of the settlement date, so late uploads cost employees returns directly.
• Reconciliation. Uploaded amounts are matched against the remittance and against the payroll register. Mismatches leave contributions sitting in suspense.
• Reporting. Employee and employer contributions are reflected in Form 16 Part B, and the 80CCD(2) deduction is factored into monthly TDS computation rather than left to year-end.

Because that sequence combines a payroll deduction, a third-party portal, a fund transfer and a TDS impact, NPS is one of the components most often processed correctly in isolation and incorrectly in aggregate. Employers running India alongside other jurisdictions typically absorb it into a single managed payroll process rather than maintaining a separate manual workflow for it.

Common NPS contribution errors in Indian payroll

• Applying the 14% employer cap to employees who have opted for the old regime, where the private-sector cap is 10%
• Calculating the cap on gross salary or CTC instead of basic plus DA
• Ignoring the ₹7.5 lakh combined PF, superannuation and NPS perquisite threshold for senior employees
• Missing the ₹1,000 annual Tier I minimum for employees who joined late in the financial year
• Attempting to route employer contributions into Tier II accounts, which PFRDA does not permit
• Delaying contribution file uploads, causing unfavourable NAV allotment and employee complaints
• Failing to update TDS projections when an employee switches tax regimes mid-year

Frequently asked questions

Is it mandatory for private employers in India to offer NPS?

No. NPS is voluntary for private-sector employers. It is mandatory for central government employees who joined service on or after 1 January 2004, and for state government employees under corresponding state notifications. Private companies that choose to offer it register under the NPS Corporate Model through a Point of Presence. Employees of non-participating companies can still join individually through the All Citizen Model – that route simply does not qualify for the Section 80CCD(2) employer deduction, since there is no employer contribution to deduct.

What is the maximum NPS contribution allowed in a year?

There is no statutory ceiling on how much a subscriber may contribute. PFRDA permits unlimited contributions to both Tier I and Tier II. The limits that matter are tax limits, not contribution limits: ₹1.5 lakh under Section 80CCD(1) within the combined 80C ceiling, an additional ₹50,000 under 80CCD(1B), and the employer’s 10% or 14% of basic plus DA under 80CCD(2). Contributions above those thresholds are perfectly legal – they simply attract no further deduction.

Can an employee claim NPS deductions under the new tax regime?

Only for the employer’s contribution. Under the new regime, Sections 80CCD(1) and 80CCD(1B) – including the well-known additional ₹50,000 – are not available. Section 80CCD(2) survives, at the higher cap of 14% of basic plus DA for both government and private-sector employees. This is why many employers now restructure CTC to include an employer NPS component: it is one of the few remaining ways to reduce taxable income for employees who have moved to the new regime. Payroll systems must therefore apply a different cap depending on each employee’s regime election, and re-run projections if that election changes mid-year.

What happens if the minimum annual contribution is missed?

A Tier I account that receives less than ₹1,000 in a financial year is frozen. The subscriber cannot transact until it is unfrozen, which requires paying the shortfall along with a small reactivation charge through the CRA portal or the NPS mobile app. The accumulated corpus is unaffected and stays invested, but a frozen PRAN also blocks employer contribution uploads – so payroll teams often discover the problem only when a contribution file rejects. Checking PRAN status before each upload avoids it entirely.

How should an employer handle NPS for employees who join or leave mid-year?

The PRAN is portable, so a new joiner brings an existing account rather than opening a second one. Payroll should collect the PRAN at onboarding and map it to the corporate registration instead of creating a duplicate. For leavers, contributions stop with the final payroll run and the account stays with the individual, who can continue contributing personally or through a new employer. Both the employee’s own contributions and the employer’s share for the part-year must be reflected accurately in Form 16, and the 80CCD(2) cap is applied on the salary actually paid during the employment period rather than on an annualised figure. For multi-country employers, this handover is far cleaner when onboarding, payroll and exit sit on one platform – see how it works within global payroll outsourcing.

How Mercans helps

Mercans is a global leader in payroll technology and Employer of Record services, delivering proprietary HR and payroll solutions across 160 countries with in-country delivery teams, native SaaS infrastructure and an uncompromising focus on security and compliance.

In India, Mercans operates through its own legal entity rather than relying on third-party sub-processors, which means accountability for statutory accuracy sits with a single provider. Our India delivery covers NPS alongside Provident Fund, ESI, professional tax, gratuity and TDS, with regime-aware calculation logic, CRA-ready contribution files and reconciliation built into every cycle rather than bolted on at year-end.

• Payroll services in India – managed and SaaS payroll with full statutory compliance
• Employer of Record and PEO in India – hire and pay in India without setting up an entity
• Global payroll outsourcing – one console, one data model, 160 countries
• About Mercans – two decades of global payroll expertise

Expanding into India, or cleaning up an existing India payroll? Talk to a Mercans payroll specialist.