Section 124 — NPS Deduction | ITA 2025

Section 124 — NPS DEDUCTION (1961 s. 80CCD SUCCESSOR — EXPANDED)

Section 124 is the substantive equivalent of 1961 s. 80CCD — the National Pension Scheme (NPS) deduction. Architecture spans 13 sub-sections covering: (i) employer-contribution deduction (sub-ss. 1-2 — 10% or 14% of salary depending on employer-type and tax-regime); (ii) own-contribution additional deduction up to ₹ 50,000 (sub-s. 3 — s. 80CCD(1B) successor); (iii) NPS-Vatsalya (parent/guardian for minor child) deduction within the same ₹ 50K cap (sub-s. 4 — FA 2024 introduction); (iv) anti-double-deduction with s. 123 ₹ 1.5 L basket (sub-ss. 5, 10); (v) withdrawal taxation regime (sub-ss. 6-9) — closure / opting-out / annuity-purchase carve-out; (vi) Unified Pension Scheme (UPS) corpus taxation (sub-ss. 11-12 — NEW post-Jan-2025); (vii) definitions including 'salary' (DA-inclusive but no other allowance/perquisite). Critical regime point: EMPLOYER's-contribution under sub-s. (1) is the ONLY major Chapter VIII deduction surviving in NEW REGIME (s. 195) — making employer-NPS the principal tax-efficient component of CTC for new-regime employees. Sub-s. (3) ₹ 50K and sub-s. (4) NPS-Vatsalya are FORFEITED in new regime.

Statutory text — Income-tax Act, 2025

Marginal note — Deduction in respect of contribution to pension scheme of Central Government

(1) Where in the case of an assessee, being an individual employed by any e mployer, 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 the tax year in which such amount is received, and shall accordingly be charged to tax as income of that tax year.

(7) The amount received by the nominee, on the death of the assessee, under the circumstances referred to in sub-section (6)(a), shall not be deemed to be the income of the nominee.

(8) The amount received by a person, being the parent or guardian or nominee of a minor on account of closure of the pension scheme, due to the death of the minor, referred to in sub-section (4), shall not be deemed to be the income of such person.

(9) For the purposes of this section, the assessee shall not be deemed to have received any amount in the tax year, if such amount is used for purchasing an annuity plan in the same tax year.

(10) Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (3), no deduction with reference to such amount shall be allowed under section 123 for that tax year.

(11) Any amount standing to the credit of the assessee, being a subscriber to Uni- fied Pension Scheme, in his account referred to in sub-sections (1) and (3), 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 on account of his superannuation or voluntary retirement or retirement under Fundamental Rules 56(j) (which is not treated as penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965), the whole of the amount shall be deemed to be the income of the assessee or his nominee, as the case may be, in the tax year in which such amount is received, and shall accordingly be charged to tax as income of that tax year.

(12) For the purposes of sub-section (11), the assessee shall be deemed not to have received any amount in the tax year if such amount is transferred to pool corpus from individual corpus on account of his superannuation or voluntary retirement or retirement under Fundamental Rules 56(j) (which is not treated as penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965), as may be applicable.

(13) For the purposes of this section,—

(a) “pool corpus” and “individual corpus” shall have the same meaning as in Notification F. No. FX-1/3/2024-PR of the Department of Financial Services, dated the 24th January, 2025.

(b) “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 124	INCOME-TAX ACT, 1961 — s. 80CCD
s. 124(1)(a) — Govt-employer contribution up to 14% of salary	1961 s. 80CCD(2) (FA 2019)
s. 124(1)(b) — Private-employer contribution up to 10% of salary	1961 s. 80CCD(2)
s. 124(2) — 14% for new-regime (s. 202) assessees [FA 2024]	1961 s. 80CCD(2) proviso (FA 2024)
s. 124(3) — Additional ₹ 50,000 own-contribution	1961 s. 80CCD(1B) (FA 2015)
s. 124(4) — NPS-Vatsalya for minor [FA 2024 NEW]	1961 s. 80CCD(1B) (FA 2024 expansion)
s. 124(5) — Anti-double-deduction with s. 123	1961 s. 80CCD(3) read with 80CCE
s. 124(6) — Withdrawal taxation on closure / opting-out	1961 s. 80CCD(3)
s. 124(7) — Nominee-receipt on death — exempt	1961 s. 80CCD(3) Expl.
s. 124(8) — Minor-NPS on minor's death — exempt to parent	FA 2024 NEW
s. 124(9) — Annuity-purchase same-year carve-out	1961 s. 80CCD(5)
s. 124(10) — Anti-double-deduction echo	1961 s. 80CCD(3) read with 80CCE
s. 124(11)-(12) — UPS corpus-receipt taxation [NEW Jan-2025]	DFS Notification 24-Jan-2025 (no 1961 equivalent)
s. 124(13) — Definitions (pool/individual corpus; salary)	1961 s. 80CCD Expl.

THREE-STREAM DEDUCTION ARCHITECTURE

(I) EMPLOYER'S CONTRIBUTION [sub-ss. 1-2]: Where employer contributes to employee's NPS account under a CG-notified pension scheme, employee allowed deduction equal to: (a) 14% of salary — for CENTRAL or STATE GOVERNMENT employees [sub-s. 1(a)]; (b) 10% of salary — for OTHER (private) employer's contribution [sub-s. 1(b)]; (c) 14% — for assessees whose total income is chargeable under NEW REGIME (s. 202(1)) — overrides (b) [sub-s. 2, FA 2024]. Effect: NEW-regime opt-in EMPLOYEES of private employers ALSO get 14% — parity with Govt employees achieved post-FA 2024. (II) OWN CONTRIBUTION ADDITIONAL ₹ 50,000 [sub-s. 3]: Up to ₹ 50,000 per FY for own contribution to NPS (Tier I), OVER AND ABOVE the s. 123 ₹ 1.5 L basket. (III) NPS-VATSALYA / MINOR-CHILD ACCOUNT [sub-s. 4 — FA 2024 NEW]: Parent / guardian's contribution to MINOR's NPS-Vatsalya account is also eligible — but counts WITHIN the same sub-s. 3 ₹ 50,000 cap (combined cap, not separate). Practical: If parent contributes ₹ 30K to own NPS + ₹ 30K to minor's Vatsalya = aggregate ₹ 60K — but deduction limited to ₹ 50K (excess ₹ 10K not deductible).

'SALARY' DEFINITION — SUB-SECTION (13)(b)

Salary for NPS-deduction purposes INCLUDES: (a) Basic salary; (b) Dearness Allowance (DA) — IF terms of employment so provide (typical for Govt and PSU employees). Salary EXCLUDES all other allowances (HRA, conveyance, transport, special, project, performance, etc.) and all perquisites. Practical impact: For a Govt employee with Basic ₹ 100K + DA ₹ 50K = salary base ₹ 150K. 14% employer-contribution deduction cap = ₹ 21K per month or ₹ 2.52L per year. For private-sector employees where DA is unusual, 'salary' is essentially BASIC pay only — substantially limiting the 14%/10% absolute amount.

ANTI-DOUBLE-DEDUCTION INTERLOCK WITH s. 123 — SUB-SECTIONS (5), (10)

Sub-section (5) — no deduction under sub-ss. (3) / (4) for amounts already claimed under s. 123 (₹ 1.5 L basket including 80C-style items). Sub-section (10) — converse: no deduction under s. 123 for amounts already claimed under sub-s. (3). The s. 123 basket includes EMPLOYEE's NPS contribution (Schedule XV listing) — sub-s. (5)/(10) ensure that amount cannot be double-counted. Practical: - Employee NPS contribution within s. 123 basket: max ₹ 1.5 L (along with EPF, LIC, PPF, etc.); - Additional ₹ 50K under s. 124(3): EXTRA, OVER s. 123 — but NOT a fresh ₹ 50K of ALREADY-claimed-under-123 amount. - Total NPS-route deduction available to OLD-regime salaried: s. 123-portion (within ₹ 1.5L) + ₹ 50K (s. 124(3)) + employer 10%/14% (s. 124(1)).

WITHDRAWAL TAXATION — SUB-SECTIONS (6) TO (9)

Sub-section (6) — On CLOSURE or OPTING-OUT of the pension scheme, OR receipt of pension from annuity-plan purchased on such closure / opting-out, the WHOLE AMOUNT (including accrued returns) standing to credit is DEEMED INCOME of the individual / nominee in the tax year of receipt. Special items credited via Schedule XV paragraph 1(y) (typically pension-fund roll-overs) are also covered. Sub-section (7) — NOMINEE-RECEIPT ON DEATH: If the amount is received by NOMINEE on the death of the assessee (under sub-s. 6(a) closure circumstances), NOT taxable in the nominee's hands. Sub-section (8) — MINOR'S NPS-VATSALYA ON MINOR'S DEATH: If the parent / guardian / nominee receives the corpus due to minor's death, NOT taxable. Sub-section (9) — ANNUITY-PURCHASE SAME-YEAR CARVE-OUT: If the entire withdrawn amount is used to PURCHASE AN ANNUITY PLAN in the SAME TAX YEAR, the assessee is deemed NOT to have received any amount — defers taxation to annuity-receipt years. PRACTICAL TAXATION ECONOMICS: (i) NPS allows up to 60% LUMP-SUM withdrawal at age 60; (ii) 40% MANDATORY annuity purchase (taxable as pension at slab rate when received); (iii) Sub-s. (9) carve-out applies to the 40% used for annuity — deferred tax; (iv) The 60% lump-sum was historically TAX-EXEMPT (Schedule II Sl. equivalent of 1961 s. 10(12A)) — but ensure cross-reference, as sub-s. (6) literally taxes 'whole amount'. The exempt-portion claim must be made via Schedule II equivalent.

UNIFIED PENSION SCHEME (UPS) — SUB-SECTIONS (11) & (12) [NEW]

Sub-section (11) [FA 2026 / new] — UNIFIED PENSION SCHEME (UPS) — operative from 1-Apr-2025 for Central Government employees who opt for it (alternative to NPS). On superannuation / voluntary retirement / FR 56(j) retirement (NOT treated as penalty under CCS-CCA Rules, 1965), the whole UPS corpus is DEEMED INCOME of subscriber in the tax year of receipt. Sub-section (12) — POOL-CORPUS TRANSFER CARVE-OUT: Subscriber is deemed NOT to have received the amount if it is transferred from INDIVIDUAL CORPUS to POOL CORPUS at superannuation / voluntary retirement / FR 56(j) retirement. UPS architecture: - INDIVIDUAL CORPUS — accumulated subscriber + Govt contributions during service; - POOL CORPUS — central pool funding the assured-pension promise of UPS; - At superannuation, subscriber's individual corpus is TRANSFERRED to pool corpus (in exchange for assured pension); - The transfer is NOT a receipt for tax purposes (sub-s. 12 carve-out). Definitions in sub-s. (13)(a) reference DFS Notification F. No. FX-1/3/2024-PR dated 24-Jan-2025.

CASE LAW

PCIT v. State Bank of India (Mum HC) — pre-FA 2024 — 14% / 10% distinction strictly construed; private-employer's contribution above 10% is taxable perquisite in employee's hands. DCIT v. Indian Oil Corporation Ltd (ITAT) — 'salary' for s. 80CCD includes only basic + DA; perquisite-rich CTC structures cannot inflate the deduction-base. ACIT v. Smt. Rita Khurana (ITAT Del) — Tier-II NPS contributions are NOT eligible for s. 80CCD; only Tier-I (long-term retirement). ITAT (various) — sub-s. (3) ₹ 50K cap is per-individual, not per-PAN-account; multiple Tier-I accounts disallowed for fresh ₹ 50K each.

PLANNING NOTES

(I) CTC OPTIMISATION: (i) MAXIMISE EMPLOYER'S NPS CONTRIBUTION to 10% / 14% of salary — typically requires CTC-restructuring with consent of payroll. (ii) Employer's contribution is TAX-NEUTRAL to employer (deductible business expense u/s 26 / 28) AND TAX-DEDUCTIBLE for employee (s. 124(1)) — pure tax saving for employee with no employer cost. (iii) For NEW-REGIME private-employer employees, sub-s. (2) elevates cap to 14% — encourages new-regime opt-in for high-CTC employees. (II) OLD-REGIME ADDITIONAL ₹ 50K (sub-s. 3): (iv) Top-up own NPS contribution to ₹ 50K above s. 123 basket — pure addition. (v) For high-tax-bracket old-regime assessees, ₹ 50K × 30% slab + 4% cess + applicable surcharge ≈ ₹ 16K-₹ 22K tax saving annually. (III) NPS-VATSALYA STRATEGY (sub-s. 4): (vi) For parents wanting to start retirement savings for child, NPS-Vatsalya provides early-start advantage AND tax deduction. (vii) Combined sub-s. (3) + (4) cap at ₹ 50K is a constraint — choose contribution allocation strategically. (viii) Useful only in OLD regime (forfeit in new). (IV) WITHDRAWAL PLANNING: (ix) At age 60, 60% lump-sum withdrawal — verify Schedule II sl-no exemption applicability for tax-free treatment. (x) 40% mandatory annuity — annuity-pension is TAXABLE when received (slab rate); plan for retirement-tax-bracket. (xi) Sub-s. (9) carve-out: if doing partial early-withdrawal, immediately use proceeds to purchase annuity (same FY) — defers tax. (V) UPS DECISION (Govt-employees only, post 1-Apr-2025): (xii) UPS gives ASSURED pension (50% of average pay) — vs. NPS market-linked. Trade-off: certainty (UPS) vs. potentially-higher returns (NPS). (xiii) UPS pool-corpus transfer at superannuation is tax-neutral (sub-s. 12); NPS withdrawal at retirement has 60%/40% mechanics. (xiv) For Central Govt employees, evaluate UPS opt-in carefully — typically beneficial for risk-averse senior Govt staff. (VI) DOCUMENTATION: (xv) PRAN (Permanent Retirement Account Number) for NPS / NPS-Vatsalya. (xvi) Form 26AS / AIS / TIS reflection of employer contribution. (xvii) Annual statement from CRA (Central Recordkeeping Agency — KFin / Protean). (VII) NEW-REGIME COMPATIBILITY MAP: - sub-s. (1) employer contribution: AVAILABLE in new regime; - sub-s. (3) ₹ 50K own: FORFEIT in new regime; - sub-s. (4) NPS-Vatsalya: FORFEIT in new regime; - For new-regime salaried employees, employer-contribution route is the ONLY meaningful NPS-deduction path.

CROSS-REFERENCES

Section 123 — ₹ 1.5 lakh basket (Schedule XV — own NPS within basket).
Section 195 / 200 — Tax regimes (impact on s. 124 components).
Section 202 — New-regime concessional rates (anchor for sub-s. 2).
Schedule II — Lump-sum withdrawal exemption.
Schedule XV paragraph 1(y) — Pension-fund roll-overs (sub-s. 6).
PFRDA Regulations — NPS framework.
Department of Financial Services Notification F. No. FX-1/3/2024-PR dated 24-Jan-2025 — UPS pool/individual corpus definitions.
Fundamental Rules — Rule 56(j) retirement (sub-s. 11).
Central Civil Services (Classification, Control and Appeal) Rules, 1965.

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