Section 124 (80CCD): Deduction of Income Tax in India

A deduction is an eligible amount reduced from your Gross Total Income (GTI), helping reduce your taxable income and overall tax liability. One such deduction is available under Section 124 of the Income Tax Act 2025, earlier referred to as Section 80CCD under the Income Tax Act 1961.

What is Section 80CCD?

Section 124 of the Income Tax Act 2025, formerly known as Section 80CCD of the Income Tax Act 1961,  allows you to claim a deduction for the amounts that you invest in the National Pension System (NPS) and the Atal Pension Yojana (APY). If you are wondering what is 80CCD in income tax, it refers to the earlier provision governing these deductions. You can claim a deduction of a maximum amount of ₹2 lakhs under Section 124  in a given financial year. The ₹2 lakhs has sub-caps of ₹1.5 lakhs and ₹50,000 under Section 124 , including investments made under Section 123 (formerly known as Section 80C) as well.

Components of Section 80CCD

Section 80CCD under the Income Tax Act 1961 is divided into different subsections based on the type of contribution and the taxpayer claiming the deduction. 

• Section 80CCD (1): Under this subsection, you can claim a deduction of up to ₹1.5 lakh in a given financial year. The contributions may be made by you, your employer or even the government. The contributions may be made either to NPS or APY.
  
  
  • Section 80CCD(1B): Another section nested under section 80CCD(1) and allowing an additional deduction of up to ₹50,000 from your taxable income when contributing to the NPS.

• Section 80CCD (2): If your employer contributes money to your pension fund, you can claim a deduction of up to the employer's contribution, subject to the applicable limits under the Income Tax Act.  
  
  Note: As per the Income Tax Act, 2025, effective from 1 April 2026 (following the Budget 2026 legislative changes), the provisions previously contained under Section 80CCD of the Income-tax Act, 1961, including Section 80CCD(1) (employee/self-contribution), Section 80CCD(1B) (additional ₹50,000 deduction), and Section 80CCD(2) (employer contribution), have been consolidated and renumbered as Section 124. The new Section 124 reorganises these deductions into a single provision while substantially retaining their underlying tax treatment, with updated sub-sections and expanded provisions where applicable.

Investment Option Under Section 80CCD- NPS

The National Pension System (NPS) is an avenue for long-term savings and for planning cash flows post-retirement through market-linked returns. The National Pension System (NPS) is managed by the Pension Fund Regulatory and Development Authority (PFRDA), a body set up by an Act of the Indian Parliament.

Details About the National Pension System (NPS):

NPS, or the National Pension System,  has been a great long-term investment option for dedicated retirement savings. Here are the rules and conditions for investing in and withdrawing funds from NPS:

• Eligibility:
  
  
  1. If you are a resident or non-resident Indian citizen in the 18-70 years age group, you may contribute to the NPS
  2. You must contribute periodically with amounts of your choice
• Returns
  
  
  1. Your investments generate a corpus in the long run
  2. Save for retirement and get an adequate income each month after you retire.
  3. The corpus is used to generate annuities/cash flows, commonly called a pension
  4. Your contributions are invested by the Pension Fund Regulatory and Development Authority PFRDA across asset classes such as equity, corporate debt, government securities, and alternative investment funds, depending on your investment choice. 
  5. NPS’s historical returns have been between  13%-16% in its different schemes. For example, if you invest ₹1,000 per month for 25 years at an 11% rate of interest, the corpus would be approximately ₹16 lakhs.
• Types of Accounts: NPS accounts are of two types: Tier 1 and Tier 2. Tier I accounts primarily focus on retirement savings, offer eligible tax benefits, and permit partial withdrawals subject to the applicable conditions.  Tier 1 accounts are used for corpus creation while planning for pension and retirement. Tier II accounts are voluntary savings accounts that offer greater withdrawal flexibility but generally do not provide tax benefits.

Terms & Conditions of Section 124 (formerly known as 80CCD)

The terms and conditions applicable to investments made under Section 124 of the Income Tax Act  2025 are:

• You may claim a deduction irrespective of whether you are salaried or self-employed

• Investment is optional for private-sector employees and self-employed individuals

• The maximum limit for deduction is ₹2 lakhs, including the additional deduction available under Section 124 

• If you claim a deduction under Section 124 (previously known as 80CCD), you cannot claim the same again under Section 123 (formerly known as 80C)

• The combined amount to be claimed as a deduction under both Sections 123  and 124 cannot exceed ₹2 lakhs

• Monthly pension payments are liable for taxation

• The deduction is to be claimed when you file your income tax returns each year.

Other Investments to Maximise Annual Deductions

There are a host of other options you may consider for investing your money and saving on taxes. A few are listed below:

1. Public Provident Fund (PPF): PPF is a good avenue to save on taxes under Section 123 (formerly 80C) and also earn a guaranteed return. A big plus-it is backed by a sovereign guarantee of the Indian government. Both employed and self-employed people can use this to save on taxes and create wealth.
   
   
2. Sukanya Samriddhi Yojana (SSY): SSY focuses on the education and marriage of the girl child, creating financial security for her. It secures the child’s future by empowering the parents to build a fund that gives a guaranteed interest rate of 8.2% per annum.
   
   
3. Equity-Linked Savings Scheme (ELSS): An ELSS is a type of mutual fund that comes with an attractive tax benefit. If you invest up to ₹1.5 lakhs in ELSS, you can claim a deduction from taxable income under Section 123 of the Income Tax Act 2025. The investment will be locked for 3 years, after which you can redeem the amount or switch over to another fund.
   
   
4. Unit Linked Insurance Plan (ULIP): A ULIP is a 2-in-1 plan because it creates wealth plus offers a life cover to financially protect your family in case of your unfortunate, untimely demise. Amounts paid towards premiums are deductible from taxable income under Section 123 (formerly known as 80C), whereas all payouts which fall under Schedule II(2) (previously known as Section 10(10D)) are exempt; otherwise, it is taxable. ULIP is truly equivalent to NPS when it comes to long-term investing.
   
   The following features make ULIPs your preferred investment choice for retirement:
   
   
   • Benefit from flexible policy terms and premium payment options to suit your financial goals.  Make partial withdrawals after the mandatory five-year lock-in period, subject to the policy terms and conditions. 
   • Invest in a diversified portfolio of equity and debt funds
   • Manage your asset mix with automated strategies to mitigate equity market risk.
   • Enhance your life insurance cover by adding optional riders, subject to the policy terms and conditions. 

Investments should be carefully planned so that you benefit from the growth of the fund as well as the money saved due to tax benefits. Look out for instruments that give you tax benefits on investment and also on maturity. Have a balance of different types of such investments in your portfolio so that you make an overall gain from the process.

Conclusion

Section 124 of the Income Tax Act 2025 (formerly Section 80CCD of the Income Tax Act 1961) provides valuable tax benefits for eligible contributions to the National Pension System (NPS) and the Atal Pension Yojana (APY). Understanding the different deduction limits, eligibility criteria, and contribution types can help you claim the applicable tax benefits while building a retirement corpus. Before making investment decisions, evaluate your financial goals and choose tax-saving options that align with your long-term financial plan.