Know the essentials Section 80CCD of Income Tax Act, 1961. Check the additional Income Tax Exemption under Section 80CCD for contribution in NPS. For more details regarding Section 80CCD, refer the following content.
Deduction for NPS Contribution – Section 80CCD
The Section 80CCD furnishes tax deductions to income tax taxpayer who have made contributions to the NPS (National Pension Scheme) as well as on contributions made by an organization for the same reason. Let’s take a look at the two parts of this section namely.
Section 80CCD (1): Sec 80CCD(1) deals with providing tax deductions to all assessees whether employed by the government, any other employers or self-employed individuals. The tax deduction is limited to a maximum of 10% of salary (basic + dearness allowance only) in the case of salaried employees & 10% of gross income in case of self-employed taxpayers. The deduction limit cannot exceed Rs. 1,00,000/- in a particular financial year.
Section 80CCD (2): This Section deals with the organization contribution toward an employee’s NPS funds. The Salaried Employees can claim this amount as deductions under Section 80CCD (2). The amount of deduction is limited to 10% of the employee’s salary.
The National Pension System has generated a lot of interest ever since Union Budget 2015 announced additional tax benefits for investments in the scheme. For someone in the 30% tax bracket, this is a clear benefit of Rs 15,000/- on investment of Rs 50,000/- over and above the Rs. 1,50,000/- allowed under Section 80C.
National Pension Scheme Tax Benefits
NPS – National Pension Scheme tax benefits are available through 3 sections respectively Section 80CCD(1), Section 80CCD(2) and Section 80CCD(1B). All the annuity restrictions, tax benefits, exit and withdrawal rules apply to National Pension System Tier-I account only. NPS Tier-II account is like an open-ended mutual fund. The taxpayer can take out the money at any time.
- Employee contribution up to 10% of basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for tax deduction.
- This contribution along with Section 80C has Rs. 1,50,000/- investment limit for a tax deduction.
- Self-employed can also claim this tax benefit. But, the limit is 10% of their annual income up to the maximum of Rs. 1,50,000/-.
- Employer’s contribution up to 10% of basic plus DA is eligible for deduction under this section.
- Employer’s contribution is an additional deduction as it not part of Rs 1,50,000/- allowed under Section 80C.
- It is also beneficial for the organization as it can claim tax benefit for its contribution by showing it as the business expense in the profit and loss account.
- Self-employed people cannot claim this tax benefit.
- Additional exemption up to Rs 50,000/- in NPS is eligible for income tax deduction.
- Introduced in Budget 2015, from FY 2015-16.
- Taxpayers in the highest tax bracket of 30% can save Rs. 15,000/- by investing Rs. 50,000/- in the National Pension Scheme.
- Those in the 20% tax bracket can save around Rs. 10,000/-, while people in the 10% tax bracket can save Rs. 5,000 per year by investing in the NPS.
- The additional tax benefit of Rs. 50,000/- is over and above the benefit of Rs. 1,50,000/- which can be claimed as a deduction under Section 80CCE.
- It is irrespective of the type of employment. So, a government employee, a private sector employee, self-employed or an ordinary citizen can claim the benefit of Rs. 50,000/- under Section 80CCD(1B).
Deduction under Section 80CCD
Section 80CCD furnishes for Income Tax deductions for contributions made to the notified National Pension Scheme of the Central Government i.e. for contribution to the National Pension Scheme (NPS). The Tax Deduction under this Section is only available to Individuals and not to HUF’s. The Individual assessee claiming the deduction under Section 80CCD may be Resident or Non-Resident.
Section 80CCD(1): Deduction to NPS Scheme for Contribution by the Individual. Deduction under Section 80CCD(1) is not only available to Salaried Individuals, but non-salaried individuals can also contribute to the National Pension System Scheme and avail deduction for the same.
The maximum amount allowed as a deduction under Section 80CCD(1) as follows.
- For the Salaried Employee: 10% of his salary for the financial year (The Salary includes Dearness Allowance but excludes all other Allowances and Perquisites).
- For Self Employee: 10% of the Gross Total Income in the Financial Year.
Tax on Amount Received Back from The NPS Scheme
The contribution made to the NPS Scheme would be received back by the employee as Pension after retirement or on surrender of the policy (as the case may be).
Union Budget 2016: On withdrawal from the NPS Account, 40% of the accumulated balance shall be exempt from Tax and the remaining would be taxed as per the Income Tax Slabs in the year of receipt. If the amount received by a taxpayer has been used for purchasing an annuity plan in the same year in the year of receipt, the taxpayer would be deemed to have not received any amount from the NPS Scheme, and therefore, no tax would be levied on the same.