India’s salaried class is experiencing a big shift in how their salary packages are structured. After the new tax regime became the default option from April 2023, private companies are now thinking of changing the CTC (Cost to Company) model. The change aims to include the corporate NPS (National Pension System) to help employees save on taxes.
Chartered Accountants and tax consultants have confirmed that many firms are exploring the idea of offering corporate NPS as part of employees’ salary under the flexible benefits plan. This comes as the demand for tax-saving options grows under the new system, where most traditional exemptions are no longer available.
Why Are Companies Pushing NPS in New CTC Plans?
Earlier, employees enjoyed tax benefits under the old regime through HRA, standard deduction, and many other exemptions. But under the new tax regime, these exemptions are not available. Instead, the government has allowed tax deduction on the employer’s contribution to NPS under Section 80CCD(2), which provides a 14% deduction for central government employees and up to 10% for private sector employees.
Now, companies are looking at the maximum possible 14% contribution for private employees as well, which makes it attractive under the new tax regime. Bhavesh Shah, Senior Partner at Mumbai-based Hasmukh Shah & Company LLP, said that in April 2025, several companies asked their employees if they would like to include NPS under their CTC flexi-pay component.
This move helps both parties — companies reduce payroll tax liability, and employees get extra savings and long-term retirement benefits.
How NPS Helps in the New Tax Regime
Even though the new tax regime removed most deductions like HRA, LTA, and 80C, the government kept the employer contribution to NPS as a key tax-saving tool. Under Section 80CCD(2), the employer’s NPS contribution is not taxed in the hands of the employee, up to 14% of basic salary and DA.
So, if a company includes NPS in the salary structure instead of giving it as a taxable allowance (like a special allowance or a bonus), the employee saves a large amount in tax.
Mayank Mohanka, Director of TaxAaram.com, says this structure change is especially useful for employees who don’t have HRA or housing loan claims. Companies are shifting special allowances to corporate NPS to lower the employees’ taxable income under the new regime.
Which Employees Benefit Most?
Naveen Wadhwa, Vice President of Taxmann, explains that this structure benefits mid to high-level earners more. For example, if an employee earns Rs. 12.75 lakh to Rs. 14 lakh annually, and the employer contributes 14% of basic salary to NPS, the individual can almost bring their income down to the tax-free slab by using the new regime wisely.
In contrast, employees earning more than Rs. 24 lakh annually and claiming HRA above Rs. 8 lakh may still find the old tax regime more beneficial.
So, the choice between old and new tax regimes still depends on an individual’s salary breakup and claimable deductions. But for many, especially those who don’t pay high rent or have no housing loan, corporate NPS offers a smart way to cut tax.
New Trend: Shifting Special Allowances to NPS
Special allowances in salary structures are 100% taxable. Companies are now replacing that with employer contributions to NPS, which not only builds employee retirement savings but also reduces the effective tax on the same income.
This trend marks a practical use of the only remaining major deduction in the new tax regime. Experts say that both employers and employees must understand how to calculate these savings correctly.
HRA Still Matters — But Only for Some
HRA (House Rent Allowance) has always been a major tax-saving tool. But it is only available under the old tax regime. Mayank Mohanka says that the old regime now benefits only those employees whose salary is Rs. 85,000 or more per month and who are also able to claim HRA meaningfully.
As per Wadhwa, those with annual income above Rs. 24 lakh and potential tax deductions above Rs. 8 lakh might still stick to the old regime because HRA has no fixed upper limit.
This makes HRA the last-standing large-scale tax benefit under the old system. So, employees should calculate wisely before making a permanent switch.
Many Use Parents for HRA — But Be Careful
A lot of employees, especially in metro cities like Mumbai and Bengaluru, pay rent to their parents to claim HRA. While this is legal, it must be done properly. Experts warn that showing sudden or very high rent payments may attract a tax audit.
CA Chirag Chauhan from Mumbai advises that if you are claiming rent paid to your parents, keep proper documents such as a registered rent agreement and rent receipts. If the rent amount increases too much in a short time, it can cause red flags under Section 143(3) of the Income Tax Act. This section allows tax authorities to scrutinize suspicious tax deductions.
Employees Becoming More Tax Smart
Another key reason behind this shift is the growing awareness among employees about tax planning. Young professionals are now more conscious about how their salary is structured and how it affects their take-home and long-term savings.
Employers, too, are learning that offering flexible NPS benefits can improve employee satisfaction, reduce attrition, and promote retirement planning. Experts say that in the next few years, corporate NPS might become a common feature in Indian CTC models, much like PF and gratuity today.
What Should Employees Do Now?
If you are a salaried employee, especially in the private sector, you should:
- Ask your HR or finance team if NPS can be included in your CTC.
- Calculate the actual tax saving under both regimes before switching.
- Keep documents ready if you claim HRA under the old system.
- Use corporate NPS as a retirement and tax-saving tool if you’re in the new tax regime.
Making the right choice can reduce your tax and improve your future financial security.
Sources: Hasmukh Shah & Company LLP, Taxaaram.com, Taxmann, CA Chirag Chauhan
Disclaimer: The above article is for informational purposes only. Please consult a qualified tax advisor before making any changes to your salary structure or filing taxes.
