The Income Tax Department of India offers deduction 80CCD to tax payers for making contributions towards National Pension Scheme (NPS). The deduction is availed under Section 80CCD and is available only to individuals.
Entities such as a HUF cannot avail deduction 80ccd under this section. Whereas, the individual tax payer may or may not be a resident of India.
What is National Pension Scheme (NPS)?
National Pension Scheme (NPS) is a voluntary contribution scheme launched by the Government of India. Earlier, the scheme was only available to Government employees. Post 2009, this scheme is open to all and even non-salaried people can invest in the same. Investment in NPS allows taxpayers to gain tax benefits during contribution as well as maturity.
Who can claim deduction 80CCD?
Post 2009, contribution in NPS has become open. Nowadays, both salaried as well as non-salaried people can invest in NPS and claim deduction 80CCD(1). Maximum deduction allowed to such people are:
- Salaried tax payers: 10% of salary during a financial year, including DA. Other benefits will be ignored.
- Non-Salaried tax payers: 20% of Gross Total Income in a financial year. Earlier, the allowed deduction was 10%, it was increased by another 10% from FY 2017.
- Amount paid or deposited by the assesee to his account in a notified pension scheme (i.e. New Pension Scheme) subject to a maximum of Rs.50,000.
Eligible Amount of Deduction 80CCD
Currently, a taxpayer is eligible to get ₹1,50,000 as deduction under Section 80CCD. Additionally, during 2015 Budget another addition of ₹50,000 was made by Finance Minister, Arun Jaitley under new sub-section 1B. Therefore, currently a tax payer can claim a total of ₹2,00,000 as deduction by combining Section 80CCD and Section 80C.
Aggregate amount of deduction u/s 80C, 80CCC and 80CCD(1) is restricted to Rs.1,50,000 vide Sec 80CCE. However, deduction u/s 80CCD (1B) in respect of deposit by the assesee in the pension scheme upto maximum of Rs. 50,000 and u/s 80CCD(2) (in respect of contribution by Central Govt/employer to the pension scheme) shall be available in addition to this limit.
Deduction 80CCD for Contribution made by the employer
As per the prevailing rules, if any employer is contributing towards his employees’ NPS, then such amount shall qualify for a deduction 80ccd under the books of employees. Section 80CCD(2) specifically deals with this scenario and allows employees to claim deduction even if the contribution is coming from the pocket of his employer.
- Deduction for contribution made by the employee himself towards NPS – Section 80CCD(1)
- Deduction for contribution made by the employer towards NPS – Section 80CCD(2)
Taxability on matured amount from NPS
The current policy states that tax payers who had invested in NPS shall be allowed a maximum exemption of 25% of the contribution provided the withdrawal was partial. Earlier, in 2016, 40% of the accumulated balance was exempted from tax and the remaining amount shall be taxed under the normal tax slab.
There happens to be an exception on taxing NPS. If the tax payer decided to invest the matured amount from NPS under any annuity plan during the same year, then it is deemed that no income was generated from NPS Scheme and hence, no tax would be levied on the same.
There are also various other chapters that takes into account the contribution made by a tax payer towards Pension Plans. Have questions related to deduction 80CCD? Feel free to put them down in the comment section!