- Sanskar Garg
Sec 80CCD of Income Tax Act, 1961: Deduction in respect of contribution to pension schemes.
Updated: Oct 7, 2022
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Employees can contribute to Government notified Pension Schemes (like National Pension Scheme - NPS). The contributions can be up to 10% of the salary (salaried individuals) and 50,000 additional tax benefit u/s 80CCD (1b) was proposed in Budget 2015.
Employee's contribution - Section 80CCD(1): As per Budget 2017-18, the self-employed (individual other than the salaried class) can now contribute up to 20% of their gross income and the same can be deducted from the taxable income under Section 80CCD (1) of the Income Tax Act, 1961, as against current 10%. To claim this deduction, the employee has to contribute to the Govt. recognized Pension schemes like NPS. The 10% of salary limit is applicable for salaried individuals only and Gross income is applicable for non-salaried. The definition of Salary means Basic + Dearness Allowance.
Employer's contribution - Section 80CCD (2): If the employer contributes to the Pension Scheme, the whole contribution amount (14% of salary) can be claimed as tax deduction under Section 80CCD (2).
Deduction for pension scheme -section 80CCD(1B): Additional exemption up to 50,000 in NPS is eligible for income tax deduction. Contributions toAtal Pension Yojana are also eligible. Deduction is allowed on contributions up to 50,000. The additional tax deduction of Rs 50,000 u/s 80CCD (1b) is over and above this 1.5 Lakh limit.
Illustration: Mr N is a central government employee and he contributes Rs 70,000 to NPS account. His salary structure is as below:
Basic Salary – Rs 2,20,000
Dearness allowance – Rs 80,000
Other Allowances and Perquisites – Rs. 2,00,000
Investments under section 80C – Rs. 80,000
Now, he can claim only Rs 42,000 under section 80CCD(1), i.e. lower of the following-
NPS contribution- Rs 70,000
14% of basic and dearness allowance- Rs 42,000
Restricted to unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000).
Suppose in the above example, if investments under Section 80C were Rs 1,20,000, then the deduction under Section 80CCD(1) will be restricted to the unexhausted limit of Section 80C, i.e. Rs 30,000.