Deduction for Contribution to National Pension Scheme
The scope for tax benefits offered under Section 80CCD of Income Tax Act, 1961 was improved through the Union Budget 2015 to attract more people towards making NPS investments. The amendments, introduced by the Finance Minister, Arun Jaitley, increased the deduction limit under Section 80CCD (1A) from INR 1 lakh INR 1.5 lakh (as per sub section 1A of Section 80CCD). Further, an additional deduction of up to INR 50,000 was initiated under the new sub-section 1B. This additional tax benefit is offered over and above the deduction limit under Section 80C of the Income Tax Act, 1961.
Section 80CCD has been classified into two distinct sub-sections to clearly define tax deduction eligibility for assesses. One sub-section defines rules regarding tax deductions that salaried and self-employed individuals can avail for contributions made to NPS. The other sub-section focuses on provisions for employers contributing to the NPS funds of their employees.
While claiming tax deductions, the Income Tax form has to clearly specify whether it is a self-contribution or a contribution made by an employer on behalf of its employee. Transaction statements have to be presented as a proof for claiming tax deductions under Section 80CCD.
Section 80CCD comprises of two sections:
Section 80CCD (1)
This sub-section of Section 80CCD defines the rules related to tax deductions that income tax assesses can avail, irrespective of whether they are employed by the government or any other employers or are self-employed. This applies to all citizens of India, including NRIs, between the ages of 18 years to 60 years to NPS, who contribute to the NPS voluntarily.
The deduction is restricted to a maximum of 10% of salary for salaried employees and 10% of gross income for self-employed taxpayers, i.e. taxpayers who are not salaried employees. Here, salary refers to the total of basic pay and dearness allowance. However, this was applicable only for the FY 2016-17 because the limit has been increased to 20% from the next financial year, i.e. FY 2017-18 onwards. The deduction amount cannot be more than INR 1.5 lakh in a particular fiscal year.
Part (1B) under Section 80CCD has been introduced through amendments made to the 2015 Union Budget. It offers an additional deduction of INR 50,000 for assesses, both salaried and self-employed, who have contributed to NPS. After including 80CCD (1B), the maximum deduction limit is restricted to no more than INR 2 lakh. Tax benefits under this sub-section can be claimed over and above deductions the limit of Section 80CCD (1).
Section 80CCD (2)
This sub-section of Section 80CCD of Income Tax Act, 1961 is applicable when an employer contributes towards an NPS fund on behalf of its employees. An employer can contribute towards an employee’s NPS, along with contributions towards PPF and EPF. The contribution of the employer can be equal or higher or lower than the employee’s contribution towards NPS. Deductions under this section can be availed only by salaried employees and not self-employed. The employed are eligible for deductions over and above the limit as per Section 80CCD (1).
In this case, employees can claim deductions under Section 80CCD (2) up to 10% of their salary, i.e. basic salary and dearness allowance taken together, or equivalent to the gross total income or equivalent to the contribution made towards NPS by the employer.
