Every tax season, the National Pension System (NPS) becomes a trending conversation topic. After all, tax deductions form an integral part of financial planning. Every time you contribute to the NPS, you invest in your future and enjoy savings today. Let’s better understand the deductions available under Section 80CCD of the Income Tax Act and how they impact you.
What is Section 80CCD?
Section 80CCD of the Income Tax Act allows tax deductions for contributions made towards notified pension schemes. Its purpose is to encourage long-term retirement savings by reducing taxable income when you invest in approved pension products such as the National Pension System.
The section is divided into three parts.
- Section 124(1)6 of the Act
Covers self-contribution, whether you are salaried or self-employed.
- Section 124(1)3 of the Act
Covers contributions made by your employer to your NPS account and applies only to salaried individuals.
- Section 124(3)1 of the Income-tax Act, 20252
Provides an additional deduction for your own NPS contribution, over and above the standard limits.
| Section | Who can claim | What the deduction is for | Maximum limit |
| 124(1)6 of the Act | Salaried and self-employed | Your own contribution to NPS or APY | Up to 10% of salary (Basic + DA) for salaried or up to 20% of gross total income for self-employed, within the overall ₹1.5 lakh limit under Section 1234 of the Act |
| 124(1)3 of the Act | Salaried only | Employer’s contribution to your NPS account | Up to 14% of salary (Basic + DA), under the New Tax Regime; or 10% (Private) / 14% (Govt) under the Old Tax Regime, over and above the ₹1.5 lakh limit |
| 124(3)1 of the Income-tax Act, 20252 | Salaried and self-employed | Extra deduction for your own NPS contribution | Up to ₹50,000, over and above the ₹1.5 lakh limit |
NPS Deductions Under Section 80CCD
Every time you invest in your Tier I NPS account, you can claim tax deductions against three separate sections under Section 80CCD of the Income Tax Act of 2025.
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Section 124(1)6 of the Act
Under this section, you enjoy a maximum deduction of Rs. 1.5 lakhs or 10% of your basic annual salary, whichever is lower. Self-employed individuals investing in the NPS can claim a deduction of up to 20% of their gross income up to the limit of Rs. 1.5 lakhs. These deductions fall under the umbrella of Section 123 read with Schedule XV of the Income-tax Act, 2025
and are only available under the old tax regime.
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Section 124(3)1 of the Income-tax Act, 20252
The Government introduced an amendment to Section 80CCD (1) under this section, allowing for an additional deduction of up to Rs. 50,000 per year against NPS contributions. Due to this amendment, you can now enjoy tax deductions up to Rs. 2 lakhs per year against your contributions towards a financially secure future. However, you can only enjoy the deduction if you file your taxes as per the old regime.
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Section 124(1)3 of the Act
Under this section, employees can claim a deduction against contributions made by their employers towards their NPS accounts. Since it deals with employer contributions, only salaried individuals are eligible for this deduction. The maximum amount you can claim depends on whether you’re a government or private sector employee. Government employees can enjoy deductions of up to 14% of their salary. Conversely, private-sector workers can only claim a deduction of up to 10% of their annual income. The deduction under this section can be claimed even by individuals who file taxes according to the new regime.
Eligibility to Claim 80CCD Deduction
To claim a deduction under Section 80CCD, you must make a contribution to an eligible pension scheme during the relevant financial year. Both salaried and self-employed individuals can claim deductions for their own contributions, subject to the limits prescribed under each sub-section of the law.
If you are salaried, you may also be eligible to claim a deduction for the contribution made by your employer to your National Pension System account. This employer contribution is treated separately from your own contribution and does not fall within the common deduction limit of ₹1.5 lakh under Section 1234 of the Act. However, please note that the employer’s total contribution to your NPS, Provident Fund, and superannuation is exempt only up to a combined annual limit of ₹7.5 lakh.
The availability of Section 80CCD deductions also depends on the tax regime chosen. Under the New Tax Regime, deductions for personal contributions under Section Section 124(1)6 of the Act and Section 124(3)1 of the Income-tax Act, 20252 are not available. However, the employer’s contribution under Section 124(1)3 of the Act can be claimed under both the Old and New Tax Regimes.
In all cases, the contribution must be made to an approved account, such as an NPS Tier I account. Contributions made to non-eligible or non-notified accounts do not qualify for tax deduction.
Types of Pension Schemes Eligible under Section 80CCD
Section 80CCD applies only to specific pension schemes. These focus on long-term retirement savings.
- National Pension System
- Atal Pension Yojana
- NPS Vatsalya
National Pension System under 80CCD
The National Pension System is a regulated retirement savings scheme. It is where you invest regularly to build a pension corpus. Contributions made to an NPS Tier I account qualify for deduction under Section 80CCD. If you are salaried, you can claim up to 10% of your Basic salary plus Dearness Allowance under Section 124(1)6 of the Act. If you are self-employed, you can claim up to 20% of your gross total income. You can also use Section 124(3)1 of the Income-tax Act, 20252 to claim an extra deduction of up to ₹50,000 for your own contribution. Employer contributions to NPS qualify separately under Section 124(1)3 of the Act.
Atal Pension Yojana under 80CCD
Atal Pension Yojana is a government pension scheme designed mainly for individuals in the unorganised sector. Under this scheme, you contribute a fixed amount based on your age and the pension amount you choose. Contributions made to the Atal Pension Scheme qualify for deduction under Section 80CCD, subject to the limits that apply to your case. This allows you to use APY not only to secure a fixed pension after retirement. It also helps reduce your taxable income while you are earning.
NPS Vatsalya under 80CCD
NPS Vatsalya offers tax benefits to parents or legal guardians who invest for their child’s long-term financial future. Contributions made to an NPS Vatsalya account are eligible for tax deduction under Section 124(3)1 of the Income-tax Act, 20252 of the Income Tax Act, 2025. Some parents can claim an additional deduction of up to ₹50,000, over and above the ₹1.5 lakh limit available under Section 123 read with Schedule XV of the Income-tax Act, 2025/Section 124(1)6 of the Act, under the Old Tax Regime.
Crucially, this ₹50,000 is a shared limit. It covers both the parents’ own voluntary NPS contributions and their contributions toward the child’s NPS Vatsalya account combined.
By availing this additional deduction, parents can enhance their overall tax savings while building a retirement corpus for their child through the NPS framework. Once tax benefits are considered, the focus can then shift to operational aspects such as opening an NPS Vatsalya account and managing contributions effectively.
How to Claim Deduction Under Section 80CCD
To claim a deduction under Section 80CCD, you must follow a few clear steps and keep proper records.
- Start by contributing to an eligible pension scheme such as NPS Tier I or Atal Pension Yojana during the relevant financial year. Ensure that the contribution is made to the correct account type, as only approved pension accounts qualify for deduction.
- Collect proof of contribution, such as the NPS transaction statement or payment receipt. This documentation is required while reporting deductions in your income tax return.
- If you are salaried, verify your salary slip or Form 16 to confirm the employer’s contribution to your NPS account. This amount qualifies separately under Section 124(1)3 of the Act.
- While filing your income tax return, enter the amounts under the applicable sub-sections, based on eligibility and the tax regime selected. Deductions for personal contributions under Section 124(1)6 of the Act and Section 124(3)1 of the Income-tax Act, 20252 are available only under the Old Tax Regime, while employer contributions under Section 124(1)3 of the Act can be claimed under both tax regimes.
- Keep all supporting documents ready in case verification is required by the tax authorities.
NPS and Taxes – Things to Keep in Mind
The NPS allows tax deductions under three sections of the Income Tax Act. Before you claim these amounts, you must keep a few things in mind:
- The maximum total deduction available under Section 80CCD is Rs. 2 lakhs, which includes the additional deduction available under 80CCD (1b).
- If you’ve claimed tax benefits under 80CCD, you cannot claim them again under Section 80C. The maximum claim for Section 80C should not exceed Rs. 2 lakhs.
- Monthly payments received from the NPS or surrendered accounts will be taxed.
- The NPS amount that you reinvest in an annuity plan is tax-exempt.
Registering for the NPS allows you to invest in your future. The tax deductions can go a long way in helping you save today for a financially secure tomorrow. You must submit the Transaction Statement as proof of investment to claim the deductions. At maturity, you can enjoy further tax exemptions, making the NPS a great financial tool to help plan your future.
FAQs on Section 80CCD
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What is the maximum limit for Section 124(1)3 of the Act?
Section 124(1)3 of the Act has an 124(1)3 of the Act deduction for the employer’s contribution to an employee’s NPS account. For government employees, the limit is 14% of salary (Basic + DA). For private sector employees, the limit is now 14% under the New Tax Regime (as per the latest updates for 2025-26) and 10% under the Old Tax Regime.
This deduction is over and above the ₹1.5 lakh limit under Section 1234 of the Act. However, employer contributions to Provident Fund, NPS, and approved superannuation funds are exempt only up to a combined limit of ₹7.5 lakh per financial year.
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What is the difference between Section 124(1)6 of the Actand Section 124(3)1 of the Income-tax Act, 20252?
Section 124(1)6 of the Act covers your own contribution to NPS or Atal Pension Yojana and is included within the overall ₹1.5 lakh limit under SSection 1234 of the Act.
Section 124(3)1 of the Income-tax Act, 20252 provides an additional deduction of up to ₹50,000 for your own NPS contribution, over and above the ₹1.5 lakh limit. This additional benefit is available only under the Old Tax Regime.
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What is the difference between Section 124(1)6 of the Act and Section 124(1)3 of the Act?
Section 124(1)6 of the Act covers an individual’s own contribution to the National Pension System or Atal Pension Yojana and is included within the overall ₹1.5 lakh limit under Section 1234 of the Act.
Section 124(1)3 of the Act is only for salaried individuals and covers the employer’s contribution to the employee’s NPS account. This deduction is separate from the ₹1.5 lakh limit and is available under both the Old and New Tax Regimes.
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Can both employee and employer claim deductions under 80CCD?
Yes, both can claim tax benefits simultaneously. As an employee, you can claim your personal investments under Section 124(1)6 of the Act and Section 124(3)1 of the Income-tax Act, 20252. Simultaneously, your employer’s contribution is deductible under Section 124(1)3 of the Act—a unique benefit available under both tax regimes. This “dual-claim” strategy is one of the most effective ways to lower your taxable income while building a retirement corpus.
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Can I claim both Section 124(1)6 of the Act and Section 124(1)3 of the Act together?
Yes. A salaried individual can claim NPS Tax Benefits for personal contributions under Section 124(1)6 of the Act and Section 124(3)1 of the Income-tax Act, 20252 deduction. But they have to opt for the Old Tax Regime. Separately, the section Section 124(1)3 of the Act benefit for employer contributions can be claimed under both the Old and New Tax Regimes.
