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nism-series-xa-nps-section-80ccd1b-exclusive-deduction[ INVESTMENT ADVISER (LEVEL 1) ]

Under Section 124 of the Income-tax Act, 2025 (the erstwhile Section 80CCD(1B) of the Income-tax Act, 1961), what is the exclusive additional tax deduction available for individual voluntary contributions to the National Pension System (NPS Tier I)?

[ A ]An additional deduction of up to ₹5,00,000.

[ B ]Zero tax deduction; NPS contributions are fully taxable as luxury spending.

[ C ]An exclusive additional deduction of up to ₹50,000 per financial year OVER AND ABOVE the ₹1,50,000 Section 123 ceiling (the erstwhile Section 80C) (Total aggregate deduction up to ₹2,00,000).[ CORRECT ]

[ D ]A flat government cash subsidy of ₹50,000 credited to bank accounts.

Takeaway

Option C is correct: An exclusive additional deduction of up to ₹50,000 per financial year OVER AND ABOVE the ₹1,50,000 Section 123 ceiling (the erstwhile Section 80C) (Total aggregate deduction up to ₹2,00,000).

Derivation

Section 124 of the Income-tax Act, 2025 (the erstwhile Section 80CCD(1B) of the Income-tax Act, 1961) exists specifically to encourage voluntary retirement saving beyond what Section 123 (the erstwhile Section 80C) already covers. It grants a deduction of up to ₹50,000 for individual contributions to NPS Tier I, and critically, this deduction sits outside and on top of the ₹1,50,000 combined Section 123 ceiling (the erstwhile Section 80C/80CCC/80CCD(1)) rather than competing for space within it. That means a taxpayer under the Old Tax Regime who has already exhausted the full ₹1,50,000 limit through PPF, ELSS, or insurance premiums can still claim an additional ₹50,000 purely through NPS, taking total eligible deductions to ₹2,00,000 in a financial year. This exclusivity is the specific feature the exam tests, as opposed to NPS contributions made within the ordinary Section 123 sub-limit (the erstwhile 80CCD(1)), which do count against the ₹1,50,000 cap.

Why the others fail

A — An additional deduction of up to ₹5,00,000.

Section 124 (the erstwhile Section 80CCD(1B)) is capped at a much smaller ₹50,000, not ₹5,00,000; overstating the figure this far exceeds any statutory NPS deduction limit.

B — Zero tax deduction; NPS contributions are fully taxable as luxury spending.

NPS contributions attract substantial deductions under both Section 123 and Section 124 (the erstwhile Sections 80CCD(1) and 80CCD(1B)); they are not taxed as luxury spending with zero relief.

D — A flat government cash subsidy of ₹50,000 credited to bank accounts.

Section 124 operates as an income tax deduction reducing taxable income, not as a direct cash transfer or subsidy credited to a bank account.