Blog > Section 80CCD of Income Tax – Deduction for National Pension Scheme Contribution

Section 80CCD of Income Tax – Deduction for National Pension Scheme Contribution

by Varun Advani | 25 June 2015

A National Pension Scheme (NPS) has become the talk of the town since the finance minister enhanced the deduction to individuals for contribution towards the above-mentioned scheme by Rs. 50,000.

 

 

So what is NPS-National Pension Scheme? The NPS is a retirement benefit scheme. An individual who is employed by the central Government (on or after January 1, 2004) will have to join NPS on compulsory basis. Any other employee (irrespective of date of joining employment) may become member of NPS, as it is optional. Even a self – employed person may join NPS.

 

For a salaried employee, an employer’s contribution to NPS is taxable as salary income in the year of contribution. But that shouldn’t demoralize you as far as the NPS is concerned, as the same shall tax deductible u/s 80 CCD (2). Contribution by the employer to NPS is deductible in the hands of the concerned employee in the year in which contribution is made. However, the maximum deduction available in respect of employer’s contribution cannot exceed 10 per cent of the salary of the employee.

 

Deduction available under section 80CCD (1) in respect of employee’s contribution to NPS-Employee’s contribution to NPS is deductible in the year in which contribution is made. However on account of employee‘s contribution to NPS is limited to 10 per cent of the salary of employee or Rs.1, 00,000 (Rs. 1,50,000 from A.Y 2016-17 onwards) whichever is lower. If any contribution is made by a person (other than an employee), deduction is limited to 10 per cent of gross total income or Rs.1, 00, 000, whichever is lower.

 

The aggregate amount of deduction under sections 80C, 80CCC and 80CCD (1) cannot exceed Rs.1, 50,000. However, the employer’s contribution towards NPS (to the extent of 10 per cent of employee’ s salary ) shall not be considered for the ceiling of Rs.1,50,000. That deduction is available over an above Rs. 1,50,000.

 

Pension (or any other payment) out of NPS account (for which deduction has been claimed under section 80CCD) will be taxable in the hands of recipient. If, however, the amount of pension received from NPS is used for purchasing an annuity plan in the same year, then it will be exempt from tax.

 

 

For calculating 10 per cent limit for the above purpose, salary’’ includes the basic salary and dearness allowance, if the terms of employment so provide and commission (if commission is calculated at a percentage of turnover achieved by an employee). However, it excludes all other allowances and perquisites (in other words, salary’’ for this purpose has the same meaning which is applicable in the case of house rent allowance).

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