Section 124 Deduction in respect of employer and assessee contribution to pension scheme of Central Government.

Income-tax Act, 2025

At a Glance

Clause 124 of the Income Tax Bill, 2025 proposes deductions in respect of employer contributions (and certain employee contributions) to pension schemes notified by the Central Government. It affects individual taxpayers who are salaried or otherwise employed, employers who contribute to such pension schemes, and guardians making deposits for minors. Effective date or enactment timing: Not stated in the document.

Background & Scope

Statutory hooks: Clause 124 is located within the Bill under the chapter heading "Deductions in respect of certain payments" and operates as a proposed tax deduction provision within the Income Tax framework. The text addresses employer contributions to pension schemes notified by the Central Government, individual contributions to the same schemes, deductions available in respect of deposits made for minors, and the tax treatment on receipt of accumulated amounts or annuity payments.

Definitions or explicit explanatory notes in the clause: The clause defines "salary" for the purposes of the provision as including dearness allowance, if the employment terms so provide, but excluding all other allowances and perquisites. No other statutory definitions (e.g., "pension scheme", "nominee") are provided in the clause itself. For other terms and administrative definitions, Not stated in the document.

Statutory Provision Mode

Text & Scope

Coverage: Clause 124 applies to an assessee who is an individual employed by an employer and to "any other assessee, being an individual" in relation to amounts paid or deposited by that person in his account under a pension scheme notified by the Central Government. The Clause allows:

• A deduction of the employer's contribution to the employee's account under a notified pension scheme, up to a percentage of the employee's salary in the tax year - 14% where the employer is the Central or State Government; 10% where the employer is any other employer.
• A substitution where an individual's total income is chargeable u/s 202(1): the 10% in the non-government employer case is treated as 14%.
• A deduction for amounts paid or deposited by an individual into his own account under a notified pension scheme, subject to an overall cap of Rs.50,000.
• An identical deduction for deposits made to a minor's account by the guardian, with an aggregate cap combined with the individual's Rs.50,000 limit.

Interpretation

Legislative intent and interpretive principles indicated by the text: The clause aims to incentivise pension savings by granting tax deductions for employer contributions (with different caps for government versus non-government employers) and to allow individuals and guardians to obtain tax relief for personal deposits into notified pension schemes. The 14%/10% split suggests a policy recognition of government employers' higher contribution norms. The clause also employs deeming provisions to tax withdrawals or annuity receipts where tax benefits were earlier claimed. The limitation on deductions overlapping with section 123 is an anti-double-dip measure.

Exceptions/Provisos

Carve-outs and conditions expressly provided in the Clause include:

• Where total income is chargeable u/s 202(1), the 10% ceiling for non-government employers is treated as 14% (sub-section (2)).
• Cap of Rs.50,000 applies to individual payments/deposits in a tax year (sub-section (3)).
• Aggregate cap for guardian deposits to a minor is combined with the individual cap (sub-section (4)).
• No deduction under sub-section (3) where the same amount already qualified for deduction u/s 123 (sub-section (5)).
• Deeming of amounts received on closure, opting out, or as annuity as taxable income in the year of receipt (sub-section (6)); exceptions for amounts received by nominees/guardians on death are specified (sub-sections (7)-(8)).

Illustrations

• Example 1: A non-government employer contributes an amount equal to 9% of an employee's salary to a notified pension scheme in a tax year - the employee may claim deduction for the full employer contribution because it does not exceed the 10% ceiling.
• Example 2: An individual deposits Rs.60,000 into his account under a notified pension scheme during the tax year - deduction allowable is capped at Rs.50,000; the excess Rs.10,000 is not deductible under this clause.
• Example 3: A guardian deposits Rs.30,000 into a minor's notified pension account, and the guardian also deposits Rs.25,000 into his own account in the same year - aggregate deduction limited to Rs.50,000, so Rs.5,000 of the combined deposits would not be deductible.

Interplay

Interaction with other provisions explicitly mentioned: sub-section (5) cross-references section 123 to prevent overlapping deductions. No other specific Rules, Notifications or Circulars are referenced in the Clause. For links to other legislative or administrative instruments beyond section 123, Not stated in the document.

Differences between Section 124 of the Income-tax Act, 2025 and Clause 124 of the Income Tax Bill, 2025 - (Old Version)

• Parent/guardian terminology in sub-section (4):

  Clause 124 (Bill): refers to the assessee "being the guardian of such minor".

  Section 124 (Act): refers to the assessee "being the parent or guardian of such minor".

  Practical impact: Act explicitly includes parent (in addition to guardian) as a person permitted to deposit for minor and claim deduction; that widens the class of persons who can claim aggregate deduction for deposits to a minor.

• Cross-reference to section 123 in sub-section (5):

  Clause 124 (Bill): "No deduction under sub-section (3) shall be allowed in respect of the amount on which a deduction has been claimed and allowed u/s 123."

  Section 124 (Act): sub-section (5) states "No deduction under sub-section (3) and (4) shall be allowed in respect of the amount on which a deduction has been claimed and allowed u/s 123." - Act extends bar to both sub-sections (3) and (4).

  Practical impact: Act prevents double claiming for contributions made for a minor where guardian/parent seeks deduction under sub-section (4); Bill only barred sub-section (3). This closes an avenue for duplicate deductions and clarifies anti-double-claim rule.

• Deeming and taxation on receipt (sub-sections (6)-(8)):

  Both texts contain similar deeming provisions treating amounts received on closure/opt-out or as annuity as income when received, and carve-outs where nominee/guardian receiving on death is not taxed. The Act contains additional sub-sections (11) and (12) and references to "Unified Pension Scheme" and "pool corpus"/"individual corpus".

  Practical impact: The Act adds explicit treatment for Unified Pension Scheme subscribers and transfers to pool corpus, clarifying taxability on superannuation/voluntary retirement and exclusions when amounts are transferred to pool corpus; the Bill lacks these specifics. This is a substantive expansion of coverage in the Act to specific schemes and modes of transfer.

• Definition/term clarification (sub-section (13)):

  Section 124 (Act) adds clause (13) defining "pool corpus" and "individual corpus" by reference to a specific Department of Financial Services Notification (F. No. FX-1/3/2024-PR dated 24 January 2025), and clarifies the meaning of "salary". Clause 124 (Bill) includes the "salary" definition but does not include clause (13) or the notification cross-reference.

  Practical impact: Act ties certain terms to an external notification, creating a linkage to administrative definitions and making the provision more scheme-specific; Bill is more generic. This affects interpretive certainty and reliance on administrative instruments.

• Nominee receipt on death (sub-sections (7) & (8)):

  Both texts contain similar non-taxation of nominee/guardian receipt on death, but the Act includes slightly different phrasing in (8) referencing parent/guardian/nominee of a minor; the Bill only references "guardian or nominee".

  Practical impact: Act broadens the protective non-taxation language to explicitly include parent in addition to guardian/nominee where minor dies.

Practical Implications

• Compliance and risk areas: Taxpayers must ensure employer contribution amounts are within the prescribed percentage ceilings (14% for government employers; 10% for others) and that personal deposits do not exceed the Rs.50,000 cap. Guardians should track aggregate deductions between their own deposits and deposits for minors to avoid exceeding the Rs.50,000 limit. Where amounts have already been claimed u/s 123, taxpayers must not claim a duplicate deduction under sub-section (3).
• Record-keeping/evidence points: Employers and employees should maintain contemporaneous records evidencing employer contributions (amount, date, scheme notified by Central Government), terms of employment evidencing dearness allowance inclusion in "salary", receipts for personal and guardian deposits into notified pension scheme accounts, and any documentation supporting the use of withdrawn amounts to purchase an annuity in the same tax year (to trigger non-deeming under sub-section (9)).

Key Takeaways

• Employer contributions to Central Government-notified pension schemes are deductible in computing an employee's total income up to specified percentage ceilings of salary (14% for government employers; 10% for others).
• Individuals may claim a deduction up to Rs.50,000 for personal deposits into notified pension scheme accounts; the same cap applies on aggregate when the guardian deposits for a minor.
• Amounts on which deductions were previously allowed become taxable on receipt (on closure, opting out, or as annuity) in the year of receipt; limited exceptions apply on death.
• Duplicate deduction is barred where the same amount has been claimed u/s 123.
• "Salary" is defined to include dearness allowance if terms of employment so provide; other allowances and perquisites are excluded.
• Where total income is chargeable u/s 202(1), the non-government employer ceiling is treated as 14% rather than 10%.
• Practical compliance requires careful record-keeping of contributions, deposit receipts, and evidence of annuity purchase to establish tax treatment on receipt of funds.

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Full Text:

Section 124 Deduction in respect of employer and assessee contribution to pension scheme of Central Government.

Pension contribution deduction: employer and individual pension contributions receive tax relief, with caps and deeming rules affecting receipt. Section 124 allows deductions for employer contributions to Central Government notified pension schemes subject to employer type percentage ceilings and for individual deposits into such schemes subject to an overall statutory cap; parent or guardian deposits for minors are aggregated with the individual cap. The provision defines salary for this purpose to include dearness allowance where employment terms so provide, disallows duplicate deduction where relief was claimed under the related provision, and deems amounts received on closure, opt out, or as annuity taxable in the year of receipt, with limited exceptions for nominee/parent/guardian receipts on death.