Section 124, Income-tax Act 2025: Deduction in respect of employer and assessee contribution to pension scheme of Central Government

What changed when Section 80CCD became Section 124?

The money is unchanged; the section split in two. Under the 1961 Act, one section (80CCD) held all three NPS breaks: your own contribution in 80CCD(1), the extra ₹50,000 in 80CCD(1B), and your employer's contribution in 80CCD(2). The 2025 Act keeps every limit and rate but moves the own-contribution limb into the Section 123 basket (the new home of 80C), and gathers the extra ₹50,000 and the employer contribution into Section 124.

So when your TY 2026-27 return cites a section for NPS, it will cite two. Section 123 for the part of your own deposit that competes with EPF, PPF and insurance inside the ₹1.5 lakh cap. Section 124 for the ₹50,000 top-up and, most importantly, for your employer's contribution, which is the single retirement deduction that outlives the switch to the new regime.

The official title of Section 124 names both sides of that employer relationship: "Deduction in respect of employer and assessee contribution to pension scheme of Central Government." The pension schemes it covers are the ones the Central Government notifies: the National Pension System (NPS), the Atal Pension Yojana and the Unified Pension Scheme among them.

Section number and title cross-checked against multiple published copies of the enacted Act.†

Which of the three NPS deductions survive in the new regime?

Read this table first: it is the whole section in one view. The column that matters most is the last one, because the default new regime strips out almost every deduction and keeps only the employer contribution.

"Salary" here means basic pay plus dearness allowance where the terms of employment provide for it, and nothing else: not HRA, not other allowances, not perquisites. Getting that base wrong is the most common NPS miscalculation.

Who can claim each NPS deduction?

Only individuals, and the three limbs do not all reach the same people. Companies, firms, LLPs and HUFs are outside Section 124 entirely, and the own-contribution breaks belong to the old regime alone.

• Salaried employees can claim all three on the old regime: the own contribution inside the Section 123 basket, the ₹50,000 top-up under 124(3), and the employer contribution under 124(1). On the new regime they keep only the employer contribution.
• Self-employed individuals have no employer, so 124(1) never applies to them. They claim their own contribution (up to 20% of gross total income) inside the Section 123 basket and the ₹50,000 under 124(3), both on the old regime only.
• Government employees claim the same limbs, with their employer contribution deductible at the higher 14% in both regimes. Central Government and most State Governments contribute to NPS by default for staff who joined from 2004.
• A deposit into a minor child's NPS account (NPS Vatsalya) is covered by its own Section 124(4), and it shares the single ₹50,000 ceiling with the 124(3) top-up rather than adding a fresh one: the parent's own deposit and the child's together cannot exceed ₹50,000.†

The minor-account route (NPS Vatsalya) was added for FY 2025-26.†

How much is the employer's NPS deduction: 10%, 14%, and the new-regime bump?

The employer limb is where the real money is now, because it is the only NPS break the new regime allows. The deductible amount is a percentage of your basic + DA, and the percentage depends on who your employer is and which regime you are on.

A government employer's contribution is deductible up to 14% of basic + DA in both regimes. A private employer's contribution was capped at 10% for years. The Finance (No. 2) Act 2024 raised the private-sector cap to 14%, but only for employees taxed under the new regime, and that change applies from FY 2024-25 (assessment year 2025-26). Section 124(2) carries the same rule into the new Act: where your income is charged under Section 202(1), the default new regime, the "10%" for a private employer is read as "14%".

The upshot is a genuine reason to prefer the new regime for a salaried worker whose employer runs an NPS benefit. On the old regime a private employee is stuck at 10%; on the new regime the same employer contribution deducts at 14%, and it stacks on top of the ₹75,000 standard deduction that the new regime also allows.

Some practitioner summaries date the private-sector 14% from FY 2025-26; the Finance (No. 2) Act 2024 applied it from assessment year 2025-26, which is the income of FY 2024-25.†

The extra ₹50,000 under Section 124(3) (old 80CCD(1B))

This is the deduction people mean when they say NPS gets you "₹2 lakh". It is a standalone ₹50,000 for money you put into your own NPS Tier-1 account, and it sits entirely outside the ₹1.5 lakh Section 123 basket. Fill the basket with EPF, PPF, insurance and home-loan principal, then add ₹50,000 of NPS, and your own-side retirement deductions reach ₹2,00,000 on the old regime.

It is your contribution only: an employer's deposit never counts here (that is the separate 124(1) limb). And it is an old-regime break, so it vanishes on the default new regime along with the rest of the own-contribution deductions. If your ₹1.5 lakh basket is not already full, ordinary NPS deposits are claimed inside Section 123 first, and only genuinely extra deposits should be routed to the ₹50,000 under 124(3).

The ₹50,000 is a hard annual ceiling for this limb, whatever you deposit. Ordinary tax-savers rarely have room to claim the full ₹1.5 lakh basket and the ₹50,000 top-up unless NPS is a deliberate part of the plan.

Watch the ₹7.5 lakh aggregate cap on employer contributions

The employer contribution feels like free, untaxed money, and for most salaries it is. But there is a ceiling that catches high earners. Your employer's contributions to your NPS, your recognised provident fund (EPF) and any approved superannuation fund are tax-free only up to ₹7,50,000 added together in a tax year. Anything above that aggregate is taxed as a perquisite in your salary, and the notional investment return earned on the excess is taxed too.

This bites independently of the Section 124 deduction. Your employer's NPS contribution can be fully within the 14% limit and still tip the combined figure over ₹7.5 lakh once EPF and superannuation are added in. When it does, the excess is added back to your taxable salary whichever regime you are on, so a very senior employee can find part of the benefit clawed back.

The rule carries over from Section 17(2)(vii) of the 1961 Act, which taxes the excess contribution, and Section 17(2)(viia), which taxes the yearly accretion on it. In the 2025 Act these sit in the salary-perquisite provisions.

Aggregate ₹7.5 lakh cap and the accretion rule are from Section 17(2)(vii) and (viia) of the 1961 Act.†

How to calculate your NPS deductions, step by step

Work the three limbs in order, because two of them fall away on the new regime:

• Find your base: basic pay plus dearness allowance for the year (only the DA that counts towards retirement benefits). Every percentage below is of this figure, not of gross salary.
• Employer contribution (both regimes): take your employer's actual NPS deposit for the year, and deduct it up to 14% of the base for a government employer or a private one on the new regime, or 10% for a private employer on the old regime.
• Own contribution inside the basket (old regime only): your own NPS deposit, up to 10% of the base, competes with EPF, PPF and insurance for the ₹1.5 lakh Section 123 cap.
• Extra ₹50,000 (old regime only): claim up to ₹50,000 of further own deposits under Section 124(3), on top of the ₹1.5 lakh basket.
• Aggregate check: add all employer contributions to NPS, EPF and superannuation. If the total tops ₹7.5 lakh, add the excess back to your taxable salary before you finish.

The employer's contribution is first included in your gross salary and then deducted under Section 124, so within the cap it nets to zero tax. The worked examples below run the arithmetic for a private employee, an old-regime saver stacking all three limbs, and a high earner who hits the ₹7.5 lakh cap.

Is the NPS deduction available under the new regime?

Partly, and the part that survives is the valuable one. On the default new regime under Section 202, your own NPS contributions earn nothing: neither the basket deduction nor the ₹50,000 under 124(3) applies. The employer's contribution under 124(1) and (2) is the exception, and it is deductible at the higher 14% for a private employee on the new regime.

That single survivor changes salary structuring. A worker on the new regime who wants any retirement-linked tax break asks the employer to route part of the package through NPS rather than paying it as taxable cash. It is the only lever left, and near the ₹12 lakh mark it can do something the old regime's deductions cannot, as the strategy section below shows.

How do you claim it, and what proof do you need?

Nothing is attached to the return, but the money has to have genuinely moved:

• For the employer contribution, the amount and the deduction both appear in your Form 16, and the contribution must actually be paid into your NPS account by the employer, not merely promised in a CTC sheet.
• For your own deposits, keep the NPS transaction statement and the PRAN (Permanent Retirement Account Number) records showing Tier-1 contributions; Tier-2 deposits do not qualify.
• Salaried taxpayers on the old regime should declare the own contribution and the ₹50,000 to the employer through Form 12BB so TDS reflects them, instead of waiting for a refund.
• Deposits count in the tax year the money actually leaves you, by 31 March. A contribution made on 2 April belongs to the next year.

Should you route salary through employer NPS?

On the new regime, employer NPS is the one deduction that can pull your income back under the ₹12 lakh line where the Section 156 rebate zeroes the tax. Take a salaried worker with ₹12,25,000 of taxable income on the new regime: after marginal relief the bill is about ₹26,000 with cess. Ask the employer to contribute ₹1,05,000 (14% of a ₹7.5 lakh basic + DA) to NPS instead of paying it as cash, and taxable income falls to ₹11,20,000. The rebate now applies, the tax drops to zero, and the ₹1,05,000 is still your retirement money. That is a ₹26,000 swing plus the corpus.

Higher up the scale the calculation is simpler: within the ₹7.5 lakh cap, every rupee your employer puts into NPS instead of taxable salary saves your marginal rate, up to 39% including surcharge and cess at the top new-regime tier. The trade-off is liquidity, because NPS money is locked until 60 with only limited early withdrawal, so route through it only what you are content to lock away for retirement. Run your own figures in the income-tax calculator before restructuring your package.

The ₹12,25,000 example uses the TY 2026-27 new-regime slabs and the Section 156 marginal-relief rule.†

Worked examples

Section 124 FAQs

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