NPS Deduction 2026-27: Employer, Own and Rs 50,000 Extra Limit (Income Tax Act 2025)

Under the Income Tax Act 2025, deductions for a pension scheme notified by the Central Government (the National Pension System, NPS, is the usual example) sit in section 124. An employer's contribution is deductible up to 10% of salary (14% if the employer is the Central or a State Government). You can claim an extra Rs 50,000 for your own deposit under section 124(3). If you are taxed at the default rates in section 202(1), the employer-contribution deduction is still available, with a 14% cap for everyone, but the Rs 50,000 extra deduction is not.

Section 125 gives a separate deduction for the Agniveer Corpus Fund under the Agnipath Scheme. This guide covers who gets which deduction, the limits, what happens to the money when you take it out, and worked examples for tax year 2026-27. The figures come from the Act as amended by the Finance Act, 2026, with the section number next to each. This article gives information, not tax advice, and does not map these sections to the 1961 Act.

What deductions does the Income Tax Act 2025 give for NPS contributions?

There are three separate routes for an individual, plus one for Agniveers. They are easy to mix up, so keep them apart.

Route	Who pays	Limit	Provision
Employer contribution	Employer pays into your pension account	14% of salary if employer is the Central or a State Government; 10% for any other employer	Section 124(1)
Own contribution, inside the general limit	You	10% of salary (employee), or 20% of gross total income (any other individual), within the overall Rs 1,50,000 limit of section 123	Section 123 with Schedule XV, para 1(y)
Own contribution, extra	You (or a parent or guardian for a minor)	Rs 50,000 in the tax year	Section 124(3) and (4)
Agniveer Corpus Fund	Agniveer, and the Central Government	Whole amount paid or contributed	Section 125(1) and (2)

"Salary" for these limits includes dearness allowance only if the terms of employment so provide, and excludes all other allowances and perquisites (section 124(13)(b); Schedule XV para 1(y)(i) uses the same wording).

Which NPS deductions survive under the section 202(1) tax rates?

Section 202(1) sets the default slab rates for individuals, HUFs and certain other persons, unless they exercise the option in section 202(4). When total income is computed for those rates, section 202(2)(a)(xii) removes the deductions in Chapter VIII, with exceptions. The exceptions that matter here are section 124(1) and 124(2) (employer contribution) and section 125(2) (Government contribution to an Agniveer's fund).

Section 124(2) adds that where total income is chargeable to tax under section 202(1), the employer-contribution cap of 10% is read as 14%. So a private-sector employee taxed under section 202(1) gets the 14% cap, the same as a Government employee.

Can a self-employed person or non-salaried individual claim the Rs 50,000?

Yes. Section 124(3) covers an employee under sub-section (1) "or any other assessee, being an individual", so a professional or business owner who deposits into a notified pension scheme account can claim up to Rs 50,000, subject to the section 202(1) position above. Employer contribution under section 124(1) needs an employer, so it does not apply to them. Section 124(1) sets the employer cap only as a percentage of salary, with no rupee ceiling.

How much can an employer contribute and you still claim?

Section 124(1) allows "the whole of the amount contributed by such employer" up to the cap, on the salary of the tax year. Anything above the cap is not deductible under this sub-section.

Employer	Cap on salary	If you are taxed under section 202(1)
Central Government or State Government	14%	14%
Any other employer	10%	14% (section 124(2))

Worked example 1: employer contribution under the two sets of rates (tax year 2026-27)

Assumptions: Meena works for a private company. Her salary for the year is Rs 8,00,000 basic plus Rs 2,00,000 dearness allowance, and her employment terms provide that the dearness allowance counts as salary. Her employer pays Rs 1,20,000 into her NPS account.

Step	Not taxed under section 202(1) (option exercised)	Taxed under section 202(1)
Salary for the cap	8,00,000 + 2,00,000 = Rs 10,00,000	Rs 10,00,000
Cap rate	10% (section 124(1)(b))	14% (section 124(2))
Cap in rupees	10,00,000 x 10% = Rs 1,00,000	10,00,000 x 14% = Rs 1,40,000
Employer contribution	Rs 1,20,000	Rs 1,20,000
Deduction (lower of the two)	Rs 1,00,000	Rs 1,20,000
Not deductible	Rs 20,000	Nil

Worked example 2: employer, own and extra contribution together (tax year 2026-27)

Assumptions: Ravi works for a private company and is not taxed under section 202(1), so Chapter VIII deductions are available to him. His salary including dearness allowance is Rs 12,00,000. His employer contributes Rs 1,20,000 to NPS. Ravi deposits Rs 1,70,000 of his own money into his NPS account. He has no other Schedule XV investments.

Item	Working	Deduction
Employer contribution, section 124(1)(b)	Cap 10% x 12,00,000 = Rs 1,20,000; contributed Rs 1,20,000	Rs 1,20,000
Own deposit under section 123 (Schedule XV para 1(y)(i))	Cap 10% x 12,00,000 = Rs 1,20,000, within the Rs 1,50,000 limit	Rs 1,20,000
Balance of own deposit under section 124(3)	1,70,000 - 1,20,000 = Rs 50,000; limit Rs 50,000	Rs 50,000
Total	1,20,000 + 1,20,000 + 50,000	Rs 2,90,000

The same rupee cannot be claimed twice. Section 124(5) bars a section 124(3) or (4) deduction on an amount already claimed under section 123, and section 124(10) bars the reverse.

Worked example 3: deposits for a minor child (tax year 2026-27)

Section 124(4) extends the Rs 50,000 deduction to payments into a minor's account under the pension scheme, made by the parent or guardian. The deduction under sub-sections (3) and (4) together cannot exceed Rs 50,000.

Assumptions: Anil is not taxed under section 202(1). He deposits Rs 40,000 in his own account and Rs 30,000 in his daughter's account, and claims nothing for these under section 123.

1. Total deposited: 40,000 + 30,000 = Rs 70,000.
2. Aggregate limit under section 124(3) and (4): Rs 50,000.
3. Deduction allowed: Rs 50,000. The other Rs 20,000 is not deductible under these sub-sections.

Real-life example: Sunita, a Government employee

Sunita is employed by the Central Government. Her salary for the year, including dearness allowance as her terms provide, is Rs 9,00,000. The Government contributes Rs 1,26,000 to her pension account. The cap is 14% of Rs 9,00,000, which is Rs 1,26,000, so the whole contribution is deductible. Had the Government contributed Rs 1,40,000, only Rs 1,26,000 would be deductible. This holds whether or not she is taxed under section 202(1), because the cap is 14% either way.

What does section 125 give an Agniveer?

An individual who enrolled in the Agnipath Scheme and subscribes to the Agniveer Corpus Fund on or after 1 November 2022 gets a deduction for the whole amount paid or deposited in the Fund during the tax year (section 125(1)). If the Central Government contributes to the account, the whole of that contribution is also deductible (section 125(2)). The Agniveer Corpus Fund is the fund holding the Agniveers' consolidated contributions and the Central Government's matching contributions, with interest on both (section 125(3)(b)).

Real-life example: Karan enrolled as an Agniveer and subscribes to the Fund every month. The Government adds its matching amount. Karan is taxed under section 202(1). Section 202(2)(a)(xii) keeps section 125(2) alive but not section 125(1), so the Government's contribution is deductible while his own payment is not deducted under section 125(1). If Karan has exercised the option and is not taxed under section 202(1), both are deductible.

Is the money taxed when you take it out of NPS?

A deduction at the contribution stage comes with tax at the exit stage. Under section 124(6), any amount standing to the credit of the account on which a deduction was allowed, with the amount accrued on it, is deemed to be the income of the individual or the nominee in the tax year it is received, when it is received:

• on closure of the account or opting out of the scheme; or
• as pension from an annuity plan bought on that closure or opting out.

Situation	Tax treatment	Provision
Closure or opting out, cash received	Whole amount is income of that tax year	Section 124(6)(a)
Pension received from an annuity plan bought on closure	Taxed as income when received	Section 124(6)(b)
Amount used to buy an annuity plan in the same tax year	Treated as not received in that year	Section 124(9)
Nominee receives the amount on the assessee's death	Not the nominee's income	Section 124(7)
Parent, guardian or nominee receives the amount on a minor's death	Not their income	Section 124(8)
Partial withdrawal as per PFRDA terms	Excluded, up to 25% of the contributions made by him	Schedule III, Sl. No. 4
Unified Pension Scheme subscriber, on superannuation, voluntary retirement or retirement under Fundamental Rules 56(j)	Whole amount is income, except an amount transferred from individual corpus to pool corpus, which is treated as not received	Section 124(11) and (12)

Real-life example: Rakesh closes his NPS account in tax year 2026-27 and receives Rs 9,00,000 (an assumed figure). If he takes it all as cash, Rs 9,00,000 is added to his income for that year under section 124(6)(a). If he uses the whole amount to buy an annuity plan in the same tax year, he is treated as not having received it that year (section 124(9)). The pension he gets from the annuity later is income in the years he receives it (section 124(6)(b)).

Worked example 4, partial withdrawal: Meena has contributed Rs 6,00,000 of her own money and withdraws Rs 2,00,000 partially, as the PFRDA Act and regulations allow. The exclusion in Schedule III Sl. No. 4 cannot exceed 25% of the contributions made by her: 6,00,000 x 25% = Rs 1,50,000. So Rs 1,50,000 is excluded, and the remaining Rs 50,000 is outside that exclusion. Check how that part is treated before filing.

Common mistakes with NPS deductions

1. Claiming the Rs 50,000 extra deduction while taxed under section 202(1). Section 124(3) is not among the Chapter VIII exceptions in section 202(2)(a)(xii).
2. Using total pay instead of "salary". The 10% and 14% caps run on basic salary and dearness allowance only if the terms of employment so provide. Other allowances and perquisites are excluded.
3. Claiming the same deposit under section 123 and section 124(3). Sections 124(5) and 124(10) block this.
4. Forgetting the Rs 50,000 is shared with the minor's account. Deposits for self and for a minor together are capped at Rs 50,000 (section 124(4)).
5. Ignoring tax on exit. A deduction allowed earlier makes closure proceeds and annuity pension taxable under section 124(6), unless the amount goes to an annuity in the same tax year.

Quick reference: limits at a glance

Item	Limit
Employer contribution, Central or State Government employer	14% of salary
Employer contribution, other employers	10% of salary (14% under section 202(1))
Own contribution, extra deduction	Rs 50,000, including deposits for a minor
Own contribution inside section 123	10% of salary or 20% of gross total income, within Rs 1,50,000 overall
Agniveer Corpus Fund	Whole amount
Partial withdrawal exclusion	25% of contributions made by the subscriber

How can a CA firm keep NPS claims straight across clients?

For a practice, the work is in checking which regime each client is under, whether employer NPS shows in Form 16, and whether the same deposit is claimed twice. Finexo's practice management software keeps client-wise checklists and reminders so these checks happen before filing. It does not compute deductions or file returns for you. For the wider picture of deductions, see our guide on standard deduction and other deductions.

Where this is in the Act

• Section 124(1), (2): employer contribution and caps
• Section 124(3), (4): Rs 50,000 deduction, minor's account
• Section 124(5), (10): no double claim with section 123
• Section 124(6) to (9): tax on closure, annuity, nominee and minor death
• Section 124(11), (12): Unified Pension Scheme exit
• Section 124(13): meaning of pool corpus, individual corpus and salary
• Section 125: Agniveer Corpus Fund deduction
• Section 123 and Schedule XV, para 1(y): own contribution inside the Rs 1,50,000 limit
• Section 202(1), (2)(a)(xii), (4): rates and which Chapter VIII deductions remain
• Schedule III, Sl. No. 4: partial withdrawal exclusion