Tax Laws and Practice · Classification and Tax Incidence on Companies

Section 124 Deduction for Employer Contribution to Pension Scheme

Updated 11 October 2026 · Fact-checked

Section 124 of the Income-tax Act, 2025 gives an employee a deduction for the employer's contribution to a Central Government notified pension scheme, up to 14% of salary for Government employers and 10% for others. It also allows an individual a separate deduction of up to ₹50,000 for own contributions.

Understand Deduction for Employer Contribution to Pension Scheme (Section 124)

Section 124 deals with contributions to a pension scheme notified by the Central Government, such as the National Pension System. It covers two different things: what your employer pays into your pension account, and what you pay yourself.

The first deduction is under sub-section (1). It applies to an individual employed by an employer. If the employer contributes to the employee's account, the employee gets a deduction for the whole contribution, but only up to a cap. The cap is a percentage of salary in the tax year: 14% if the employer is the Central Government or a State Government, and 10% for any other employer, including a company.

The second deduction is under sub-section (3). Any individual, whether or not employed, can claim a deduction of up to ₹50,000 for amounts paid or deposited in the tax year into the notified pension account. Under sub-section (4), a payment into a minor's account by a parent or guardian also qualifies, but the combined deduction under sub-sections (3) and (4) cannot exceed ₹50,000.

For this section, salary means basic pay plus dearness allowance, but only if the terms of employment provide that DA counts. All other allowances and perquisites are left out. This is the base you must use for the percentage.

The deduction is not a permanent gift. When the amount is withdrawn on closure or opting out, or received as pension from an annuity bought on such closure, it is taxed as income in the year of receipt. Some receipts are protected, such as amounts received by a nominee on the death of the assessee. The employer, for its part, gets a business deduction under section 29(1)(b) for contributions up to 14% of the employee's salary.

Key rules to remember

Employer contribution deduction (Government employer): Deduction = lower of (actual employer contribution, 14% × salary); Applies where the employer is the Central Government or a State Government. Section 124(1)(a).
Employer contribution deduction (other employer): Deduction = lower of (actual employer contribution, 10% × salary); Applies to companies and all other employers. Section 124(1)(b). Salary = basic + DA (only if terms of employment so provide).
Rate where section 202(1) applies: If total income is chargeable to tax under section 202(1), 10% is read as 14%; Section 124(2). Check the condition in section 202(1) before using 14% for a non-Government employer.
Own contribution deduction: Deduction ≤ ₹50,000 (sub-sections (3) and (4) together); Available to any individual. Includes payments to a minor's account by a parent or guardian, within the same ₹50,000 overall limit.
Employer's own deduction: Employer deduction ≤ 14% × employee's salary; Section 29(1)(b). Salary includes DA only if the terms of employment so provide; other allowances and perquisites are excluded.
No double deduction: Amount claimed under section 124(3) cannot also be claimed under section 123; Sub-sections (5) and (10).
Taxability on exit: Amount received on closure, opting out, or annuity pension = income of the year of receipt; Sub-section (6). Not taxed if received by nominee on death of assessee (sub-section (7)) or used to buy an annuity in the same tax year (sub-section (9)).

How to solve Deduction for Employer Contribution to Pension Scheme (Section 124) questions

Use this method for any question on pension scheme deduction, whether it is asked from the employee's side or the company's side.

1Identify the scheme. Check that it is a pension scheme notified by the Central Government.
2Identify who is claiming: the employee (section 124) or the employer (section 29(1)(b)).
3Compute salary for this purpose: basic plus DA only if the terms of employment so provide. Exclude all other allowances and perquisites.
4Pick the cap. For the employee, use 14% for Central or State Government employers and 10% for others, unless sub-section (2) applies. For the employer's deduction, use 14%.
5Apply the rule: deduction is the lower of actual contribution and the cap.
6Separately handle the employee's own contribution: allow up to ₹50,000 under sub-section (3), and make sure the same amount is not also claimed under section 123.
7If the question mentions withdrawal, closure or annuity, apply sub-sections (6) to (9) to decide whether the amount is taxable.
8State the conclusion clearly with the section number.

Quickest way: Salary base, cap, lower of two

When to use it: Use when the question gives you salary components and an employer contribution and asks for the deduction.

Write down basic plus DA (DA only if it counts for retirement benefits under the terms of employment). Ignore bonus, HRA, perquisites.
Multiply by 10% for a company employer, or 14% for a Government employer.
Compare with the actual contribution and take the lower figure.
Add the employee's own contribution deduction separately, capped at ₹50,000.
Write one line naming section 124 (and section 29(1)(b) if the employer is the claimant).

Common mistakes in Deduction for Employer Contribution to Pension Scheme (Section 124)

Using gross salary or including all allowances as the base for the 10% or 14% cap.
Students assume salary means everything paid by the employer.
Fix: For this section, include only basic pay and DA (and DA only if the terms of employment so provide). Exclude other allowances and perquisites.
Using 14% for a company employer.
Students remember 14% from the employer's own deduction under section 29(1)(b).
Fix: For the employee's deduction under section 124(1), a company is covered by the 10% limit, unless sub-section (2) applies. The 14% limit under section 29(1)(b) is for the employer's deduction.
Treating the ₹50,000 limit as additional to the employer contribution cap, or applying it to the employer's contribution.
Both deductions sit in one section, so they get mixed up.
Fix: The ₹50,000 limit applies only to the individual's own payments under sub-sections (3) and (4). The employer contribution under sub-section (1) has its own percentage cap.
Claiming the same own contribution under both section 124(3) and section 123.
Students treat the two deductions as independent.
Fix: Sub-sections (5) and (10) bar a second deduction for the same amount. Claim it once.
Saying the pension amount received on closure is always tax-free because a deduction was already taken.
Students confuse deduction with exemption.
Fix: Under sub-section (6), amounts received on closure, opting out, or as annuity pension are taxed in the year of receipt. Exceptions include a nominee's receipt on the assessee's death and an amount used to buy an annuity in the same tax year.
Allowing the full employer contribution as a deduction without applying the cap.
The words 'whole of the amount contributed' mislead students.
Fix: The whole amount is allowed only as far as it does not exceed the percentage of salary. Always take the lower figure.

Worked examples

Example 1

Ravi is employed by Sunrise Textiles Ltd, a private company. His basic salary for the tax year is ₹6,00,000 and dearness allowance is ₹1,00,000, which counts for retirement benefits under the terms of employment. He also receives HRA of ₹2,40,000. The company contributed ₹90,000 to his account under the notified pension scheme. Compute the deduction available to Ravi under section 124(1). Assume section 124(2) does not apply.

Show the solution

Salary for this section = basic + DA = ₹6,00,000 + ₹1,00,000 = ₹7,00,000. HRA is excluded.
The employer is a company, so the cap is 10% under section 124(1)(b).
Cap = 10% × ₹7,00,000 = ₹70,000.
Actual employer contribution = ₹90,000.
Deduction = lower of ₹90,000 and ₹70,000 = ₹70,000.

Answer: Ravi can claim a deduction of ₹70,000 under section 124(1)(b). The excess ₹20,000 is not deductible under this sub-section.

Example 2

Meera, an employee of a State Government, has basic pay of ₹8,00,000 and DA of ₹2,00,000 (DA counts for retirement benefits). The State Government contributed ₹1,20,000 to her account in the notified pension scheme. Meera herself deposited ₹60,000 in the same account during the tax year and has not claimed that amount under section 123. Compute her total deduction relating to the pension scheme.

Show the solution

Salary = ₹8,00,000 + ₹2,00,000 = ₹10,00,000.
The employer is a State Government, so the cap is 14% under section 124(1)(a).
Cap = 14% × ₹10,00,000 = ₹1,40,000.
Employer contribution ₹1,20,000 is below the cap, so the whole ₹1,20,000 is allowed.
Own deposit under section 124(3): ₹60,000 exceeds the limit of ₹50,000, so only ₹50,000 is allowed.
Total deduction = ₹1,20,000 + ₹50,000 = ₹1,70,000.

Answer: Meera's total deduction is ₹1,70,000: ₹1,20,000 under section 124(1)(a) and ₹50,000 under section 124(3). The balance ₹10,000 of her own deposit is not deductible.

Exam tips

Always define salary first. Marks are often lost because the base was wrong; state that it is basic plus DA (if terms so provide) and excludes other allowances and perquisites.
Name the employer type in your answer. The 14% versus 10% split is the most tested point, and the company case uses 10% for the employee's deduction.
Keep the three limits apart in your answer: the percentage cap for employer contribution, the ₹50,000 own-contribution limit, and the employer's own 14% deduction under section 29(1)(b).
If the question mentions withdrawal or closure, add a line on sub-sections (6) to (9). Show that you know when the receipt is taxable and when it is not.
Write in ICSI style: the provision, then the working, then a one-line conclusion citing the section.

Practice questions from Classification and Tax Incidence on Companies

Deduction for Employer Contribution to Pension Scheme (Section 124) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deduction for Employer Contribution to Pension Scheme (Section 124): frequently asked questions

What is the deduction limit for employer contribution to pension scheme under section 124?

The deduction is the whole of the employer's contribution, up to 14% of salary if the employer is the Central or State Government, and up to 10% of salary for any other employer. Salary means basic plus DA if the terms of employment so provide. Sub-section (2) substitutes 14% for 10% where the total income is chargeable to tax under section 202(1).

Does a company get a deduction for contributing to an employee's pension scheme?

Yes. Under section 29(1)(b), an employer can deduct contributions to the pension scheme referred to in section 124 for an employee, up to 14% of the employee's salary in the tax year. Salary includes DA only if the terms of employment so provide, and excludes other allowances and perquisites.

Is the ₹50,000 deduction under section 124(3) available only to employees?

No. It is available to any individual who pays or deposits an amount in his account under the notified pension scheme. A parent or guardian can also pay into a minor's account, but the combined deduction under sub-sections (3) and (4) cannot exceed ₹50,000.

Is the amount received on closure of the pension account taxable?

Generally yes. Under sub-section (6), the amount received on closure or opting out, or the pension from an annuity bought on such closure, is income of the year of receipt. A nominee receiving the amount on the death of the assessee is not taxed on it, and an amount used to buy an annuity in the same tax year is not treated as received.