If you pay into the National Pension System (NPS), or your employer pays into it for you, three different rules can reduce your taxable income. Under the old law they sat in sections 80CCD and 80CCE. Under the Income-tax Act, 2025 they have moved, and the numbers are now in two sections and one Schedule.

**What this article covers.** It covers **tax year 2026-27 onward**, which is the Income-tax Act, 2025. It does not cover returns for FY 2025-26 (AY 2026-27). Those are still filed under the Income-tax Act, 1961, where the old section 80CCD applies. This article does not state the 1961-Act limits. Ask a chartered accountant (CA) to confirm them for your FY 2025-26 return.

## Where the old sections went

If you know the old names, here is the map. The official mapping table between the two Acts shows:

- section 80CCD of the Income-tax Act, 1961 (contribution to the pension scheme of the Central Government) now sits in section 124 and Schedule XV of the Income-tax Act, 2025;
- section 80CCE of the Income-tax Act, 1961 (limit on deductions under sections 80C, 80CCC and 80CCD) now sits in section 123 of the Income-tax Act, 2025.

Both new sections are in Chapter VIII of the 2025 Act, which deals with deductions you can take from your gross total income.

## The three buckets

Think of NPS tax relief as three separate buckets. Each has its own rule.

### Bucket 1: your own contribution inside the general deduction

Section 123 of the Income-tax Act, 2025 lets an individual or a Hindu undivided family deduct the whole of the amount paid or deposited in the tax year, being the total of the sums listed in Schedule XV, up to **₹1,50,000**. The Schedule has conditions of its own.

Schedule XV is a long list. It includes life insurance premium, provident fund contributions and several other items. Paragraph 1(y) of the Schedule is the NPS entry. It covers a contribution made by an individual to a pension scheme notified by the Central Government, up to:

- **10% of salary** during the tax year, if you are an employee of the Central Government or any other employer. Here "salary" includes dearness allowance if your terms of employment say so, but leaves out all other allowances and perquisites (section 124(13)(b), Income-tax Act, 2025, which defines the word for section 124; paragraph 1(y)(i) of Schedule XV uses the same description); or
- **20% of gross total income** during the tax year, if you are any other individual, for example a self-employed professional.

So your NPS contribution is one of many items that share the single ₹1,50,000 ceiling in section 123. If you already use that ceiling on insurance premium or provident fund, your NPS contribution under this bucket adds nothing further.

### Bucket 2: a separate deduction for your own contribution

Section 124(3) of the Income-tax Act, 2025 gives a separate deduction. The Act speaks of "a pension scheme notified or as may be notified by the Central Government"; this article uses NPS as the everyday example and does not reproduce the notification. An individual, whether or not employed, can deduct up to **₹50,000** of the amount they paid or deposited in the tax year into their own account under a pension scheme notified by the Central Government.

Two linked rules stop you from counting the same rupee twice:

- No deduction under section 124(3) or 124(4) is allowed on an amount for which a deduction has already been claimed and allowed under section 123 (section 124(5)).
- The reverse is also written: where an amount has been allowed under section 124(3), no deduction on that amount is allowed under section 123 for that tax year (section 124(10)).

In plain words, a given rupee of your NPS contribution can be claimed once, either under section 123 or under section 124(3). It cannot be claimed under both.

Section 124(4) extends this to a minor's account. If you are the parent or guardian and you pay or deposit into the minor's account under the same pension scheme, the deduction under sub-section (3) also applies. The total of the sub-section (3) deduction and the sub-section (4) deduction together cannot exceed ₹50,000.

### Bucket 3: your employer's contribution

Section 124(1) of the Income-tax Act, 2025 is about the employer's money. It applies where you are an individual employed by an employer, and the employer pays into your account under a pension scheme notified by the Central Government. You get a deduction for the whole of the employer's contribution, up to a percentage of your salary in the tax year:

- **14%** where the employer is the Central Government or a State Government; and
- **10%** where the employer is anyone else.

"Salary" here has the same meaning as above: it includes dearness allowance if the terms of employment so provide, and excludes all other allowances and perquisites (section 124(13)(b)).

There is a special rule in section 124(2). Where your total income is chargeable to tax under section 202(1) of the Income-tax Act, 2025, the 10% in clause (b) is read as 14%. Section 202(1) is the section that sets out the rate table for individuals and other persons, and the rates apply unless the person exercises the option under section 202(4) to be taxed some other way. Whether this describes your situation depends on the choices you have made for the year. Check this with a CA before relying on the 14% figure.

Notice what the text of section 124(1) does not do. It does not mention the ₹1,50,000 ceiling of section 123, and it does not mention the ₹50,000 of section 124(3). It is a separate deduction with its own percentage limits. The sub-sections that stop double counting refer only to the other deductions: section 124(5) to sub-sections (3) and (4) and section 123, and section 124(10) to sub-section (3) and section 123. This article therefore does not describe the employer's contribution as being inside either of the two rupee figures.

## A worked example

This example uses only the figures above. Take a salaried employee, with a private employer, who has put ₹1,00,000 into other items listed in Schedule XV, and who also pays ₹70,000 into their own NPS account in the tax year. The employer separately pays an amount into the same NPS account.

- The ₹1,00,000 of other items uses part of the ₹1,50,000 ceiling in section 123. ₹50,000 of that ceiling is left.
- The ₹70,000 of own NPS contribution can go to section 123 (up to the ₹50,000 left, and subject to the 10% of salary limit in paragraph 1(y) of Schedule XV) or to section 124(3) (up to ₹50,000). It cannot be claimed twice.
- The employer's amount is looked at separately under section 124(1), against 10% of salary (or 14% where section 124(2) applies).

The example shows only how the rules fit together. Your own numbers decide the result, so have a CA run them.

## The new tax regime

Many salaried taxpayers now ask which deductions survive in the new regime. In the Income-tax Act, 2025 the new regime is in section 202. Under section 202(2)(a)(xii), the total income is computed without any exemption or deduction under "Chapter VIII other than the provisions of sections 124(1) and 124(2), or 125(2) or 146".

Read with the above, this means:

- The employer's contribution under section 124(1) and the 14% rule in section 124(2) are named as exceptions. They are not barred by section 202(2)(a)(xii).
- Section 123 and section 124(3) are not named among the exceptions in that clause.

The Finance Act 2026 amended section 202 of the Income-tax Act, 2025 in sub-section (2), clause (a), by omitting sub-clause (iii) (the one dealing with section 144). It did not change the words about Chapter VIII in sub-clause (xii). Whether the regime you are in applies to you in a given year is a question of the option you exercise, so check with a CA.

The old law also carves out one part of section 80CCD. Section 115BAC(2) of the Income-tax Act, 1961 bars Chapter VI-A deductions "other than the provisions of sub-section (2) of section 80CCD" (and two other named provisions). This article does not state what that sub-section says or any other 1961-Act limit.

## What the Finance Act 2026 did to sections 123 and 124

The Finance Act 2026 text on Part B (amendments to the Income-tax Act, 2025) contains no change to section 123, section 124 or Schedule XV. The sections in this article are as enacted in the Income-tax Act, 2025 (Act 30 of 2025). Rules and notifications can still change the details, such as which pension schemes are notified, so confirm the position when you file.

## When the money comes out

A deduction today can mean tax later. Under section 124(6) of the Income-tax Act, 2025, if an amount for which you got a deduction (together with what it earned) is received by you or your nominee in any tax year, then:

- on closure of the account or on your opting out of the pension scheme; or
- as pension from an annuity plan bought on that closure or opting out,

the whole amount is treated as income of the person who receives it, in the tax year of receipt, and is taxed that year.

Some exceptions are written into the same section:

- An amount received by a nominee on your death, in the circumstances in section 124(6)(a), is not the nominee's income (section 124(7)).
- Where a parent, guardian or nominee receives money from a minor's account on closure because the minor has died, it is not their income (section 124(8)).
- You are treated as not having received an amount if you use it in the same tax year to buy an annuity plan (section 124(9)).

For subscribers to the Unified Pension Scheme, section 124(11) deals with money received on superannuation, voluntary retirement or retirement under Fundamental Rule 56(j). The whole amount is treated as income in the year of receipt. Under section 124(12), no receipt is deemed if the amount is moved from your individual corpus to the pool corpus on that retirement. Section 124(13)(a) says "pool corpus" and "individual corpus" have the meaning in the Department of Financial Services notification dated 24 January 2025 (F. No. FX-1/3/2024-PR).

## What not to do

- Do not claim the same contribution under both section 123 and section 124(3).
- Do not assume the employer's contribution is capped at ₹50,000. The text gives it a percentage-of-salary limit.
- Do not apply the tax year 2026-27 rules to your FY 2025-26 return. That return follows the Income-tax Act, 1961.
- Do not take a figure from an old blog or payslip note without checking which Act it was written for.

## What to do now

- **Next step:** Add up your own NPS contributions and any employer contribution for the year, and note which regime you are using. Cite: sections 123, 124(1), 124(3) and 202(2)(a)(xii), Income-tax Act, 2025.
- **Deadline:** The due date for the return of income is set by section 263(1) of the Income-tax Act, 2025. Check the date that applies to your category of taxpayer before you file.
- **Consequence:** Sections 124(5) and 124(10) bar a second claim on the same amount, and money later received on closure or opting out is taxed as income under section 124(6).

Have a CA review your facts before you act or file.

## FAQs

**Is the ₹50,000 under section 124(3) only for people with an employer?**
No. Section 124(3) covers an assessee who is an individual, including one referred to in section 124(1) or "any other" individual.

**Can I claim NPS for my child?**
Section 124(4) allows the deduction for payments into a minor's account by the parent or guardian. The sub-section (3) and sub-section (4) deductions together cannot exceed ₹50,000.

**Does the employer's contribution count towards the ₹1,50,000 in section 123?**
The text of section 123 and section 124(1) does not tie them together, and this article does not say they are. Ask a CA to confirm how your payslip and return treat it.

**What is the percentage limit for a self-employed person?**
Paragraph 1(y)(ii) of Schedule XV gives 20% of gross total income during the tax year for an individual who is not an employee. Section 123 still caps the total of Schedule XV items at ₹1,50,000.

**Which limits apply to my FY 2025-26 return?**
Those are in the Income-tax Act, 1961, section 80CCD, not in this article. Ask a CA to confirm the limits for that year.

**Does the Finance Act 2026 change any of this?**
Not in its text: the Finance Act 2026 makes no change to sections 123 or 124 of the Income-tax Act, 2025. It does amend section 202(2)(a) of that Act by omitting sub-clause (iii), which does not affect NPS.

Canonical: https://www.harunraaj.com/blog/nps-deduction-tax-year-2026-27