NPS and Employer Pension Contribution – Section 124 Deduction Explained
- Employer contribution to your notified pension scheme account is deductible up to 14% of salary (Government employers) and, in the new regime, up to 14% for other employers too.
- Your own contribution is deductible up to ₹50,000 under section 124(3), but only if you are not taxed under the new regime.
- The employer contribution is also treated as salary income (sections 7 and 16), so it is taxed first and then deducted.
Section 124 covers deductions for contributions to a pension scheme notified by the Central Government (the National Pension System and similar schemes). It replaces the old sections 80CCD(1), (1B) and (2).
Employer contribution – section 124(1) and (2)
If your employer contributes to your pension-scheme account, you get a deduction of the whole contribution up to:
- 14% of salary where the employer is the Central Government or a State Government;
- 10% of salary for other employers – but 14% if your income is taxed under the new regime (section 202(1)) (section 124(2)).
"Salary" here means basic pay plus dearness allowance if your terms of employment provide for it, and excludes all other allowances and perquisites (section 124(13)(b)).
The employer’s contribution is deemed received by you (section 7(1)(c)) and included in salary (section 16), so it appears in your income and is then deducted. Section 202(2)(a)(xii) specifically keeps sections 124(1) and 124(2) available in the new regime.
Your own contribution – section 124(3) and (4)
You can claim up to ₹50,000 of what you pay into your own pension-scheme account in the year. Contributions to a minor’s account by a parent or guardian are covered within the same ₹50,000 limit. You cannot claim the same amount again under section 123 (section 124(5) and (10)).
This is a Chapter VIII deduction other than 124(1) and (2), so it is not available in the new regime.
Example
| Item | Amount (₹) |
|---|---|
| Basic pay + DA for the year | 10,00,000 |
| Government employer contribution (14%) | 1,40,000 |
| Deduction under section 124(1) (whole contribution, up to 14%) | 1,40,000 |
| Own contribution of ₹60,000: deduction under section 124(3) in old regime | 50,000 |
Taxation on exit
- Under section 124(6), what you or your nominee receive on closing or opting out of the scheme (including pension from an annuity bought on closure) is taxable income of that year.
- It is not treated as received if it is used to buy an annuity plan in the same year (section 124(9)).
- Amounts received by a nominee on the subscriber’s death, and by a parent or guardian on the death of a minor, are not income (sections 124(7) and (8)).
- Section 124(11) separately taxes amounts received by a Unified Pension Scheme subscriber on superannuation, voluntary retirement or retirement under FR 56(j), with transfers from individual corpus to pool corpus not counted as receipt (section 124(12)).
Employers
An employer can deduct its contribution to the scheme up to 14% of the employee’s salary under section 29(1)(b).
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This guide is for general information and is not tax advice. Tax figures are before health and education cess unless stated. The law and the official notifications are the final authority – see our Disclaimer. Found a mistake? Tell us.