Deduction in respect of employer contribution to pension scheme of Central Government
[Section-124 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 124(1) of Income Tax Act 2025
124(1) Where in the case of an assessee, being an individual employed by any employer, if an 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.
Section 124(2) of Income Tax Act 2025
124(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.
Section 124(3) of Income Tax Act 2025
124(3) An assessee referred to in sub-section (1), or any other assessee, being an individual, shall be allowed a deduction in computation of his total income of the whole of the amount paid or deposited in the tax year in his account under a pension scheme notified or as notified by the Central Government, which shall not exceed fifty thousand rupees.
Section 124(4) of Income Tax Act 2025
124(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 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 fifty thousand rupees.
Section 124(5) of Income Tax Act 2025
124(5) No deduction under sub-section (3) shall be allowed in respect of the amount on which a deduction has been claimed and allowed under section 123.
Section 124(6) of Income Tax Act 2025
124(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), 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.
Section 124(7) of Income Tax Act 2025
124(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.
Section 124(8) of Income Tax Act 2025
124(8) The amount received by a person, being the 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.
Section 124(9) of Income Tax Act 2025
124(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.
Section 124(10) of Income Tax Act 2025
124(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 as deduction under section 123 for that tax year.
Section 124(11) of Income Tax Act 2025
124(11) For the purposes of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
FAQs on Section 124 of Income Tax Act 2025
Q1. Who is eligible to claim deduction under Section 124(1) of the Income Tax Act, 2025?
An individual employed by any employer can claim deduction if the employer contributes to a pension scheme notified by the Central Government.
Q2. What is the maximum deduction allowed when the employer is the Central or State Government?
The deduction shall be allowed up to 14% of the employee’s salary.
Q3. What is the maximum deduction allowed when the employer is a private sector employer?
The deduction is restricted to 10% of the employee’s salary.
Q4. Can the 10% limit for private employers ever be increased?
Yes, if the assessee’s total income is chargeable to tax under Section 202(1), the 10% is substituted by 14%.
Q5. Is there any additional deduction available for the individual’s own contribution to the pension scheme?
Yes, under Section 124(3), an individual can claim deduction up to ₹50,000 for his own deposit in the notified pension scheme.
Q6. Can the contribution made for a minor child also qualify for deduction?
Yes, if the contribution is made by the guardian for a minor’s account under the scheme, it qualifies, but the total deduction (for both own and minor’s account) is limited to ₹50,000.
Q7. Can deduction under both Section 123 and Section 124(3) be claimed for the same amount?
No, deduction for the same amount cannot be claimed under both sections.
Q8. What happens when the pension scheme is closed or the individual opts out and receives the amount?
The entire amount received, including accrued income, becomes taxable in the year of receipt under Section 124(6).
Q9. Is the pension received from the annuity plan also taxable?
Yes, the pension received from the annuity plan purchased on closure or opting out is taxable in the year of receipt.
Q10. What if the nominee receives the amount after the death of the assessee?
Such amount is not treated as income of the nominee and hence not taxable under Section 124(7).
Q11. What if the guardian or nominee of a minor receives the amount after the minor’s death?
Such amount is also not treated as the income of the guardian or nominee under Section 124(8).
Q12. Is the amount used to buy an annuity plan in the same tax year treated as income?
No, if the amount is used to purchase an annuity plan in the same tax year, it is not deemed to be received and hence not taxable under Section 124(9).
Q13. What is the meaning of “salary” for the purpose of Section 124?
Salary includes dearness allowance (if terms of employment so provide) but excludes all other allowances and perquisites as per Section 124(11).
Q14. Can an individual claim deduction under both Section 123 and Section 124(3) in the same year for different amounts?
Yes, but not for the same contribution. No double deduction is allowed for the same amount.
Q15. Is there any limit on the number of pension schemes for which deduction can be claimed?
The section refers to a pension scheme “notified by the Central Government”, so deduction is allowed only for such notified schemes.
Q16. Is the deduction available only to salaried employees?
Section 124(1) applies to salaried individuals, but Sections 124(3) and (4) apply to any individual, salaried or not, who contributes to the notified pension scheme.
Q17. Will the interest or income accrued on the contribution be taxable?
Yes, it becomes taxable upon closure, opting out, or receipt as pension unless used for annuity purchase within the same tax year.
Q18. Can the deduction under Section 124(3) be claimed every year?
Yes, it can be claimed every tax year up to ₹50,000 subject to conditions.
Q19. Are there any consequences for violating the conditions of the pension scheme?
If the scheme is closed or opted out of, the entire amount becomes taxable under Section 124(6).
Q20. Can the pension scheme be in the name of a dependent?
Yes, contributions can be made in the name of a minor dependent child, and deduction can be claimed by the guardian within the ₹50,000 overall limit.
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