NPS Gets a Boost: 3 New Deduction Rules You Should Know

The Finance Act, 2025 introduces significant changes to Section 80CCD of the Income-tax Act, enhancing benefits and clarity for contributors to the National Pension System (NPS), particularly those contributing on behalf of minors. These changes will come into effect from from the Assessment Year (AY) 2026-27 onwards and accordingly apply to the contributions made in the NPS during the financial year 2025-26 (Current Year)

Below are the three key amendments :-

1. Deduction on Minor’s NPS Account:

Under the newly inserted second proviso to Section 80CCD(1B), parents or guardians who contribute to the NPS account of a minor can now also claim a deduction up to ₹50,000 under this sub-section under the Old Tax Regime.

• This deduction is available even if the minor is not an assessee.
• The aggregate limit under Section 80CCD(1B) remains ₹50,000, whether the contribution is to the individual’s own account or to the minor’s account.
• This is in addition to the deduction available under Section 80C and 80CCD(1).

The amendment encourages savings for future of childrens with tax incentive.

2. Clarity on Closure of Minor’s NPS Account:

The scope of Section 80CCD(3) has been expanded to include minors. It now specifies that:

• Any amount received from the NPS account of a minor, on closure or opting out of the scheme, will be treated as income of the guardian or nominee unless it is due to the death of the minor.

A new proviso has been added to exempt such amounts received on the death of a minor from being taxed in the hands of the parent, guardian, or nominee.This provides relief to families in unfortunate circumstances, aligning taxation rules with the principle of compassionate tax treatment.

3. Exemption on Partial Withdrawal from Minor’s NPS Account:

A new section 10(12BA) has been inserted to exempt partial withdrawals made by parents or guardians from a minor's NPS account, subject to conditions.

Key Points:

• Up to 25% of the total contributions made by the parent/guardian can be withdrawn partially without attracting tax.
• The withdrawal must be in line with PFRDA regulations.

The provision facilitates flexibility for parents in accessing funds for the minor’s needs (e.g., education, medical emergencies), while still preserving long-term pension goals.

Conclusion:

These changes mark a progressive step in extending NPS benefits to the next generation and offer tax incentives to parents planning their children’s financial future. By recognizing minors as valid NPS beneficiaries and ensuring favorable tax treatment, the government is promoting early-stage financial discipline and retirement planning.

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Disclaimer:

This article is based on my personal understanding of relevant provisions of the Income-tax Act and judicial precedents and should not be construed as legal advice. Taxpayers should seek professional advice for specific matters.

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