Section 80CCD Deduction
Section 80CCD Deduction
Section 80CCD is a provision in the Income Tax Act that offers a deduction for taxpayers earning pension income related to the National Pension Scheme. Section 80CCD is incorporated into Chapter VI-A of the Income Tax Act, which provides deductions for assessees corresponding to various expenditures, subject to the satisfaction of the specified conditions. The section provides deductions for the contribution to pension schemes governed by the Central Government, including the National Pension Scheme (NPS). This article briefly discusses Section 80CCD of the Income Tax Act.
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Section 80CCD deduction can be availed by taxpayers contributing to a pension fund like the National Pension Scheme or Atal Pension Yojana. In the case of employment, up to 10% of the salary in the previous year can be claimed as a deduction. For all other cases, 10% of the gross total income in the previous year is allowed as a deduction. In addition to claiming a deduction under Section 80CCD, taxpayers can also claim a deduction of up to Rs.50,000 for contributions to the National Pension Scheme. The deduction for contribution to the National Pension Scheme is admissible over and above the ceiling of deduction of Rs.1.5 lakhs under sections 80C, 80CCC and 80CCD.
Deduction for Contribution to the NPS
- The Union Budget of 2015 improved the scope of tax benefits offered under Section 80CCD of the Income Tax Act to attract more members to the NPS and make relevant investments. The latest amendments helped increase the deduction limit from INR 1 Lakh to INR 1.5 Lakhs under Section 80CCD(1A).
- As per the new Sub-section 1B, an additional deduction of up to INR 50,000 was provided. These additional tax benefits are offered over and above the deduction limit prescribed under Section 80C of the Income Tax Act. The contribution made by the employer would also be allowed as a deduction under Section 80CCD(2) while calculating the total income of the employee.
- The deduction amount under this section should not exceed 14% of the salary in the case of Central Government employees and 10% in the case of any other employees. In order to claim tax deductions, the Income Tax form has to specify if the contribution is made by the employee or an employer on behalf of their employee. Statements of the transaction are to be presented as proof for claiming any deductions under Section 80CCD.
Eligibility to claim Section 80CCD Deductions
The following are the eligibility criteria to claim deductions under Section 80CCD of the Income Tax Act.
- Individual assesses who are both salaried and self-employed.
- Every citizen of India, including NRIs, may avail of tax benefits under this section.
- Hindu Undivided Family is not eligible for tax benefits and deductions under this section.
- Deductions under Section 80CCD(1) are capped at INR 1.5 Lakhs. However, an additional deduction of up to INR 50,000 may be claimed under Section 80CCD(1B), bringing the maximum deduction limit to INR 2 Lakhs.
- Income tax assesses employed by the Central Government on or after January 1, 2004, may contribute 10% to 14% of their annual salary (Basic Salary + Dearness Allowance) towards the NPS.
- Salaried employees not employed by the Central Government could contribute 10% of their annual salary (Basic Salary + Dearness Allowance). At the same time, self-employed tax assesses could claim deductions of up to 10% of their gross income during the Financial Year 2016–17. However, since the Financial Year 2017–18, the deduction limit has been increased to 20%.
Categories under Section 80CCD
Section 80CCD of the Income Tax Act is divided into two distinct sub-sections. These sub-sections clearly define tax deductions and relevant eligibilities. One sub-section discusses the rules governing the tax deductions applicable to salaried and self-employed individuals for the contributions they make to the NPS. The other sub-section focuses on the provisions for employers who contribute to the NPS in the name of their employees.
Sub-section 80CCD(1)
Sub-section 80CCD defined the various rules concerning the income tax deduction offered to members of the NPS. This subsection applies to everyone, irrespective of who made the contribution, be it a government employee, a private employee or a self-employed individual. The provisions prescribed under this Section apply to every Indian citizen between the ages of 18 and 60 years who is a member of the NPS and has been contributing consistently. This section is also applicable to Non-Resident Indians.
The following are the key provisions stated under Section 80CCD(1):
- The maximum deduction permissible under Section 80CCD(1) is 10% of an individual’s salary (Basic Salary + Dearness Allowance) or 10% of their gross income.
- From Financial Year 2017-18, this limit has been increased for self-employed individuals from 10% to 20% of the Gross Total Income, with the maximum limit capped at INR 1.5 Lakhs for a given financial year.
The new amendment of Section 80 CCD that was introduced as Sub-section 1B in the Union Budget 2015 mentions that individuals may also claim an additional deduction of INR 50,000. The benefit is offered to both salaried as well as self-employed individuals. Therefore, this raises the maximum deduction available under Section 80CCD to INR 2 Lakhs. Tax benefits under Section 80CCD (1B) may be claimed over and above the deductions prescribed under Section 80CCD(1).
Sub-section 80CCD(2)
The provisions prescribed in Section 80 CCD(2) come into effect when an employer contributes to the NPS fund of their employee. An employer can contribute to the NPS along with those made towards EPF and PPF. The contributions made by an employer may be equal to or higher than that of the employee. This section is only applicable to salaried individuals and not to self-employed individuals. The tax deductions under this Section may exceed those prescribed under Section 80 CCD(1). Section 80CCD(2) permits salaried individuals to claim deductions up to 10% of their salary. This salary would include the basic pay along with their dearness allowance or is equal to the contributions made by their employer towards the NPS.
Sub-section 80CCD(3)
- When any amount standing to the credit of the assessee in his account referred to in Section 80CCD(1) or (1B), in which a deduction has been approved under those sub-sections or section CCD(2), together with the amount accrued thereon, if any, is obtained by the assessee or nominee, in whole or in part, in the previous year.
- As the pension received from the annuity plan purchased on such closure or opting out, the whole of the amount referred to in clause (a) or (b) would be deemed to be the income of the assessee or nominee, as the case may be, in which such amount is received in the previous year, and would be charged to tax as income of that previous year. The amount that is received by the nominee, on the death of the assessee, under the circumstances that referred in clause (a) would not be deemed into the income of the nominee.
- Any payment obtained from the National Pension System Trust to an employee on account of closure or his opting for the pension scheme referred to in Section 80 CCD, to the extent that it does not exceed more than 40% of the total amount that is payable to him during the closure or his opting out of the scheme, would be exempt from tax as per Section 10(12A).
Section 10(12A)
As per the amendment, any payment from the National Pension System Trust to an employee under the Pension Scheme referred to in Section 80CCD, on partial withdrawal that is made out of his income account in accordance with the specific terms mentioned under the Pension Fund Regulatory & Development Authority Act, 2013, and the provisions made thereon, to the extent it does not exceed 25% of the amount of the contribution.
National Pension Scheme under Section 80CCD
The National Pension Scheme (NPS) is a savings scheme backed by the Central Government that focuses on building a retirement corpus for Indian citizens. Below are a few of the NPS’s significant provisions.
- Employees of the Central Government must be a part of the NPS.
- Any other individuals may voluntarily contribute to the NPS.
- Contributions to the NPS have to be made consistently by a member until the age of 60.
- The minimum annual contribution to the NPS must be INR 6,000 or more. A minimum monthly contribution of INR 500 is also essential. This criterion must be fulfilled in order to be eligible for tax deductions under Tier 1 of the Scheme.
- The minimum annual contribution to the NPS must be INR 2,000 or more. A minimum monthly contribution of INR 250 is also essential. This criterion must be fulfilled in order to be eligible for tax deductions under Tier 2 of the Scheme.
- The NPS offers various investment instruments, such as Government securities, fixed-income-bearing instruments, and equity funds. However, the latter cannot exceed the 50% threshold limit.
- The NPS is a cost-effective market-linked investment scheme.
- The NPS permits partial withdrawals of up to 25% of the invested amount based on the reason behind the withdrawal.
- The NPS offers its members the option to withdraw up to 60% of the proceeds in a lump sum, while the remaining 40% of the investments are required to be reinvested into an annuity plan.
- For a deferred exit, 80% of the withdrawal proceeds must be reinvested into an annuity plan.
Terms and Conditions
The following are the terms and conditions to claim deductions under Section 80CCD.
- Tax benefits are applicable for salaried and self-employed assesses on contributions made to the NPS. This would include their employers as well.
- The relevant tax deductions that may be claimed is 10% of their salary (Basic Salary + Dearness Allowance) for salaried assesses or 10% of their gross income for self-employed individuals may be claimed with a maximum deduction of up to INR 1.5 Lakhs.
- An additional deduction of up to INR 50,000 for individuals who contribute toward the NPS as per Sub-section 1B from Financial Year 2016-17, increasing the maximum limit for the deductions up to INR 2 Lakhs annually.
- Tax benefits obtained under Section 80CCD cannot be claimed under Section 80C again. Moreover, the total tax deductions under Section 80C and Section 80CCD combined cannot exceed INR 2 Lakhs.
- The proceeds from the NPS received in the form of monthly pension payments or surrendered accounts shall be taxable under relevant tax slabs as prescribed under Section 80C of the Income Tax Act.
- Re-investments made into an annuity plan with the proceeds of the NPS are exempted from any tax deductions.
- Deductions under Section 80CCD(1) are capped at INR 1.5 Lakhs per year, and an additional deduction of INR 50,000 may be claimed under Sub-section 80CCD(1B), with a maximum deduction limit of INR 2 Lakhs.
Closing of Pension Account
If a taxpayer closes or opts out of the pension scheme, the whole amount received by the taxpayer would be deemed to be the income of the taxpayer in the previous year and chargeable to income tax. However, suppose the assessee uses the whole amount received in the previous year for purchasing an annuity plan in the same previous year. In that case, the amount received will not be treated as income. Also, if the amount standing to the credit of an assessee is received by a nominee on the death of the assessee, then the amount will not be deemed to be the nominee’s income.
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