Section 127Deductionswas Section 80CCD(1B) in IT Act 1961

Additional NPS Contribution (₹50,000)

An additional deduction of up to ₹50,000 for voluntary contributions to NPS Tier-I account, over and above the ₹1.5L limit under Section 123. Only under the optional regime.

Who this applies to

Individuals in the optional regime who want to save additional tax and build a retirement corpus through NPS.

Key Points

This ₹50,000 is SEPARATE from the ₹1.5L cap of Section 123 — you get a total of ₹2L in deductions if you max both.
Only NPS Tier-I contributions qualify — Tier-II is a flexible savings account and not eligible.
NPS withdrawals at maturity are partially taxable: 60% is tax-free, 40% must be invested in an annuity.
Employer's NPS contribution on your behalf (up to 10% of salary) is separately deductible under a different provision.

Worked Example

Stacking Section 123 + Section 127 for maximum benefit

Scenario

Preethi earns ₹20L salary and is in the 30% slab. She maxes out Section 123 (₹1.5L) and also contributes ₹50,000 to NPS Tier-I voluntarily.

Calculation

Section 123 deduction:  ₹1,50,000
Section 127 deduction:  ₹50,000
Total deductions:       ₹2,00,000

Tax saved at 30% slab:
  ₹2,00,000 × 30% = ₹60,000
  Add 4% cess: ₹60,000 × 1.04 = ₹62,400 total tax saved

Result

Preethi saves ₹62,400 in taxes by investing ₹2L across Section 123 instruments and NPS. The NPS also builds a retirement corpus she cannot touch prematurely — ensuring disciplined retirement savings.

Related Sections

Section 123Investments & Insurance Premium (₹1.5L limit)

Section 130Health Insurance Premium

Section 202Default Tax Regime — Slabs

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.