"It's unlucky for Ross. We all know his pedigree, we know his experience and we know what a great player he is. He'll play for CD and hopefully shoot the lights out to keep knocking the door down. The test matches are still around the corner for him.
"It's not an easy conversation telling someone they are not in a squad, but Ross took it professionally."
The health of Taylor's eye is improving. He has been regularly hitting balls and is expected to appear for Central Districts soon.
Corey Anderson has been named as a batsman. Larsen felt he could still be considered as an all-rounder in future as he recovers from a recurring back strain after the Indian tour.
Trent Boult will miss the first Twenty20 and Tim Southee will miss all three matches as they prepare for the test series.
"We've got to manage our resources carefully and prudently because they're our principal bowlers," Larsen said.
Ben Wheeler is in line to make his T20 international debut, having played six ODIs, the last in August 2015.
"It's been great to see Ben back playing cricket and getting near his best," Larsen said. "He's put in a lot of hard work to get to this point, so we're looking forward to having him back in the mix.
"His ability to swing the ball at a decent clip can trouble any batsmen, as he's shown in domestic cricket this season."
Mitchell McClenaghan, Adam Milne and Doug Bracewell were not considered due to injury.
Larsen indicated Mark Chapman, Ed Nuttall, Neil Wagner, George Worker and Seth Rance were close to selection.
Napier will host the opening Twenty20 on January 3, with the series shifting to Mount Maunganui for matches on January 6 and 8.
BLACKCAPS squad for Twenty20 Series
Kane Williamson (c)
Corey Anderson
Trent Boult
Tom Bruce
Colin de Grandhomme
Martin Guptill
Lockie Ferguson
Matt Henry
Colin Munro
Jimmy Neesham
Luke Ronchi
Mitchell Santner
Ish Sodhi
Ben Wheeler