Section 124 · Deductions
Section 124 of the Income-tax Act, 2025 — Deduction for Pension Scheme (NPS) Contributions
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter VIII
📜 What the law says — Section 124, Income-tax Act 2025
124. (1) Where in the case of an assessee, being an individual employed by any
employer, if the employer makes any contribution in his account under a
pension scheme notified by the Central Government, the assessee shall be allowed
a deduction in the computation of his total income, of the whole of the amount
contributed by such employer as does not exceed—
(a) 14%, where such contribution is made by the employer being the Central
Government or the State Government; and
(b) 10%, where such contribution is made by an employer other than an
employer referred to in clause (a),
of his salary in the tax year.
(2) Where the total income of the assessee is chargeable to tax under section 202(1),
the provisions of sub-section (1) shall have effect as if for “10%” referred to in clause
(b) of that sub-section, “14%” had been substituted.
(3) An assessee referred to in sub-section (1), or any other assessee, being an indi-
vidual, shall be allowed a deduction not exceeding ` 50000, in computation of his
total income of the whole of the amount paid or deposited in the tax year by such
individual in his account under a pension scheme notified or as may be notified by
the Central Government.
(4) The deduction under sub-section (3) shall also be allowed where any payment
or deposit is made to the account of a minor under the said pension scheme, by
the assessee, being the parent or guardian of such minor, subject to the condition
that the aggregate amount of deduction under sub-section (3) and this sub-section
shall not exceed ` 50000.
(5) No deduction under sub-sections (3) and (4) shall be allowed in respect of the
amount on which a deduction has been claimed and allowed under section 123.
(6) Any amount standing to the credit of the assessee or a minor, in his account or
the account of a minor, as the case may be, referred to in sub-sections (1), (3) and
(4) and paragraph 1(y) of Schedule XV, in respect of which a deduction has been
allowed together with the amount accrued thereon, received by the assessee or his
nominee, in whole or in part, in any tax year,—
(a) on account of closure or his opting out of the pension scheme referred
to in sub-sections (1) and (3); or
(b) as pension received from the annuity plan purchased or taken on such
closure or opting out,
the whole of the amount referred to in clause (a) or (b) shall be deemed to be the
income of the individual or his nominee, in th
In plain language
What Section 124 is about
Section 124 of the Income-tax Act, 2025 is the deduction that lets you save tax on money paid into a Central Government notified pension scheme — most importantly the National Pension System (NPS) Tier-I, the Unified Pension Scheme (UPS), the Atal Pension Yojana (APY) and NPS Vatsalya (for minors). It is the re-written and re-numbered successor of Section 80CCD of the old Income-tax Act, 1961. The tax benefit is broadly the same as before; only the drafting is cleaner, broken into logically sequenced sub-sections.
Who it applies to
- Salaried employees — both their own contribution and the amount their employer puts in.
- Self-employed individuals / professionals — for their own contribution.
- Employers — get a business deduction for their contribution.
- Parents / guardians — for money paid into a minor's NPS Vatsalya account (a new feature carried into the 2025 Act).
The three deduction buckets
- 1. Your own contribution (the general limit): A salaried person can claim up to 10% of salary and a self-employed person up to 20% of gross total income. This slots into the overall ₹1.5 lakh ceiling shared with Section 123 (the successor of 80C/80CCC).
- 2. The extra ₹50,000 (Section 124(3)): Over and above the ₹1.5 lakh, you can claim a further deduction of up to ₹50,000 for your own NPS/UPS contribution. This is the old 80CCD(1B) benefit.
- 3. Employer's contribution (Section 124(2)): The amount your employer contributes is deductible separately — it does not eat into your ₹1.5 lakh or your ₹50,000. The cap is 14% of salary for Central/State Government employers, and 10% of salary for other (private) employers. Crucially, if your income is taxed under the new regime, the private-employer cap also rises to 14%.
Key conditions and limits
- Salary here means Basic Pay + Dearness Allowance only — not HRA or other allowances.
- Minor's account (Section 124(4)): A parent/guardian can claim for a child's account, but the combined ₹50,000 of Section 124(3) and 124(4) is a single aggregate ceiling — you cannot claim ₹50,000 for yourself and another ₹50,000 for the child.
- No double-claiming: The same rupee cannot be claimed under both Section 123 and Section 124. The two sections can be used together, but not on the same contribution.
How withdrawals are taxed
- Amounts received on closure or opting out of the scheme (plus accretions) are deemed to be income and taxed at slab rates in the year received.
- Amount received by a nominee on the death of the subscriber is not taxed.
- If the closure proceeds are used in the same tax year to buy an annuity, they are treated as not received (no tax at that point).
- Under UPS, transfer from the Individual Corpus to the Pool Corpus at superannuation/voluntary retirement is not a taxable receipt.
Practical implications
The employer-contribution route is the most powerful because it sits outside all other caps and survives even in the new regime — a salaried person on the new regime should ask HR to route up to 14% of Basic+DA into NPS to shave tax with zero extra out-of-pocket restriction. The separate ₹50,000 under 124(3) is the classic "top-up" that pushes total pension-linked deductions to ₹2 lakh (₹1.5 lakh + ₹50,000) under the old regime. Remember, most Chapter VIII deductions (including the ₹1.5 lakh and the ₹50,000 self-contribution) are generally not available under the new regime — but the employer-contribution deduction is the notable exception that continues.
💡 Example
Example 1 — Salaried, old regime: Rohan's Basic + DA is ₹10,00,000. He contributes ₹1,20,000 to NPS himself and his private employer contributes ₹1,00,000 (10% of Basic+DA). His own ₹1,20,000 first fills the ₹1.5 lakh Section 123 bucket, and he separately claims a further ₹50,000 under Section 124(3) (from an additional deposit). On top of that, the employer's ₹1,00,000 is fully deductible under Section 124(2). So Rohan reduces taxable income by ₹1,50,000 + ₹50,000 + ₹1,00,000, cutting his tax bill substantially.
Example 2 — Salaried, new regime: Meera earns Basic + DA of ₹15,00,000 and is taxed under the new regime. She cannot claim the ₹1.5 lakh or the ₹50,000 self-contribution. But her private employer contributes 14% of ₹15,00,000 = ₹2,10,000, which is fully deductible under Section 124(2). At a 30% marginal rate that is roughly ₹63,000 of tax saved — money she never had to spend herself.
A relatable story: Anil, a 40-year-old shopkeeper, always thought NPS was "only for government staff." His CA showed him that as a self-employed person he could deposit ₹50,000 a year and claim it under Section 124(3) — a clean ₹50,000 off his income every year while building a retirement corpus. He also opened an NPS Vatsalya account for his 8-year-old daughter, but learned the ₹50,000 cap is shared, so he splits it thoughtfully rather than expecting a double benefit.
| Deduction bucket | Who claims | Limit | Old 1961 equivalent |
|---|
| Own contribution (general) | Salaried / self-employed | 10% of salary / 20% of GTI, within the ₹1.5 lakh ceiling | 80CCD(1) |
| Extra self-contribution | Any individual | Up to ₹50,000 (over and above ₹1.5 lakh) | 80CCD(1B) |
| Minor's account (NPS Vatsalya) | Parent / guardian | Within the same ₹50,000 aggregate as above | New (added later to 80CCD) |
| Employer contribution — Govt | Central/State Govt employee | 14% of salary (Basic + DA) | 80CCD(2) |
| Employer contribution — private | Other employees | 10% (old regime) / 14% (new regime) | 80CCD(2) |
Related sections
Section 123 — Deductions for LIC, PF, PPF, ELSS etc. (successor of 80C) Section 202 — Tax on income under the new regime (successor of 115BAC) Section 125 — Deduction for medical insurance premium (successor of 80D) Section 126 — Deduction for maintenance of a disabled dependant (successor of 80DD) Schedule XV — List of eligible savings instruments and contribution rules
Frequently asked questions
Is Section 124 the same as the old 80CCD?
Yes. Section 124 of the Income-tax Act, 2025 is the re-drafted successor of Section 80CCD of the 1961 Act. The tax benefits are essentially the same; the language is reorganised into cleaner sub-sections.
Can I still get the extra ₹50,000 NPS deduction?
Yes, under Section 124(3) you can claim up to ₹50,000 for your own contribution over and above the ₹1.5 lakh limit — but only under the old regime, not the new regime.
Does the employer's NPS contribution work under the new regime?
Yes. The employer-contribution deduction under Section 124(2) is one of the few deductions that continues under the new regime, and the cap for private employers rises from 10% to 14% of salary there.
What does 'salary' mean for the employer contribution limit?
For this section, salary means Basic Pay plus Dearness Allowance only. Other allowances such as HRA and perquisites are excluded when computing the 10% or 14% cap.
Can I claim ₹50,000 for myself and another ₹50,000 for my child's NPS Vatsalya account?
No. Section 124(3) and 124(4) share a single combined ceiling of ₹50,000. Your own contribution and the minor's account together cannot exceed ₹50,000.
Is my NPS money taxed when I withdraw it?
Amounts received on closing or opting out of the scheme are treated as income and taxed at slab rates in the year of receipt, unless used in the same year to buy an annuity. Money received by a nominee on the subscriber's death is not taxed.
Can the same contribution be claimed under both Section 123 and Section 124?
No. You can use both sections in the same year, but the same rupee of contribution cannot be claimed twice — once claimed under Section 123 it cannot be re-claimed under Section 124.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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