Section 124 of the Income-tax Act, 2025 allows a deduction for the employer's contribution to a notified pension scheme up to 14% of salary for Government employers and 10% for others, raised to 14% where income is taxed under section 202(1), plus ₹50,000 for the assessee's own contribution.
What section 124 does
Section 124 is the pension scheme deduction — the successor to section 80CCD of the Income-tax Act, 1961. It has two distinct limbs that are often confused: the employer's contribution and the employee's own contribution.
The employer limb in sub-section (1) allows the whole of the employer's contribution up to 14% of salary where the employer is the Central or a State Government, and 10% for any other employer. Sub-section (2) then does something important: where total income is chargeable under section 202(1) — the new regime — the 10% figure is substituted with 14%. Private sector employees under the default regime therefore get the same 14% as Government employees.
The employee limb in sub-section (3) allows a separate deduction of up to ₹50,000 for the amount the individual pays into their own account, and sub-section (4) extends it to a minor's account — with the combined cap staying at ₹50,000.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 80CCD(2) | Employer contribution, 14% for Government, 10% for others | 124(1) |
| 80CCD(2), proviso | 14% for all employers under the new regime | 124(2) |
| 80CCD(1B) | Additional ₹50,000 for the assessee's own contribution | 124(3) |
| 80CCD(1B), proviso | Contribution to a minor's account | 124(4) |
| 80CCD(4) | No double deduction with section 80C | 124(5) |
| 80CCE | Combined ceiling | 123 |
| 17(1)(via) | Employer contribution included in salary | 16(k) |
Section 124 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the employer limb
Where an employer contributes to an individual's account under a pension scheme notified by the Central Government, the assessee is allowed a deduction of the whole amount contributed, not exceeding 14% of salary where the employer is the Central or a State Government, and 10% of salary where it is any other employer.
Sub-section (2) — 14% for everyone under the new regime
Where the total income of the assessee is chargeable to tax under section 202(1), sub-section (1) applies as if '14%' were substituted for '10%' in clause (b). This is one of the few deductions that is more generous under the default new regime, which is why it features in most regime comparisons for salaried taxpayers.
Sub-section (3) — the employee's own ₹50,000
The same assessee, or any other individual, is allowed a deduction not exceeding ₹50,000 of the whole amount paid or deposited in the tax year by that individual in his own account under a notified pension scheme. This limb is available to any individual, not only to an employee.
Sub-section (4) — a minor's account
The sub-section (3) deduction is also allowed where the payment or deposit is made to the account of a minor by the assessee being the parent or guardian — subject to the condition that the aggregate of the deductions under sub-sections (3) and (4) does not exceed ₹50,000. It is one ₹50,000, not one per account.
Sub-section (5) — no double counting with section 123
No deduction under sub-sections (3) and (4) is allowed for an amount on which a deduction has already been claimed and allowed under section 123 — the successor to section 80C. The same rupee cannot be counted in both baskets.
Sub-section (6) onwards — taxation on withdrawal
Amounts standing to the credit of the assessee or the minor in the pension scheme account, and the treatment when they are received, are dealt with in the later sub-sections. Read them before assuming a withdrawal is tax-free, and note that the employer's contribution is first included in salary under section 16(k) before being deducted here.
Worked example
A private sector employee with a salary of ₹20,00,000 in tax year 2026-27, taxed under section 202(1).
| Item | Amount | Deduction under section 124 |
|---|---|---|
| Employer's contribution to the notified pension scheme | ₹2,80,000 (14% of salary) | ₹2,80,000 — sub-section (2) raises the private employer limit from 10% to 14% |
| Employee's own contribution to their account | ₹80,000 | ₹50,000 — capped by sub-section (3) |
| Contribution to the minor child's account | ₹30,000 | Nil — the ₹50,000 aggregate under sub-section (4) is already used |
| Total deduction | ₹3,30,000 |
Note the sequence. The employer's ₹2,80,000 is first included in salary under section 16(k), then deducted here — so it is neutral in cash terms but must appear on both sides of the computation.
Had this employee been taxed outside section 202(1), the employer limb would have been capped at 10% = ₹2,00,000, an ₹80,000 difference created purely by the regime.
Compliance checklist and due dates
- Confirm the regime: 14% applies to a private employer's contribution only where income is chargeable under section 202(1).
- Include the employer's contribution in salary under section 16(k) before claiming the deduction here.
- Treat the ₹50,000 in sub-sections (3) and (4) as a single aggregate across the assessee's own and any minor's account.
- Do not claim the same amount under both section 123 and section 124 — sub-section (5) prohibits it.
- Compute the percentage on salary as defined for this purpose, not on total income.
- Read the later sub-sections before treating a withdrawal from the scheme as exempt.
Common mistakes
- Applying the 10% limit to a private employer where the employee is taxed under section 202(1); sub-section (2) makes it 14%.
- Claiming ₹50,000 for the assessee's account and another ₹50,000 for a minor's account.
- Omitting the employer's contribution from salary and then claiming the deduction, which understates gross salary.
- Claiming the same deposit under section 123 and again under section 124.
- Assuming the 14% Government rate applies to all employers.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.