Income Tax Act provides for various deductions under Chapter VI-A for Contribution to Pension Plans. These Deductions are available under Section 80C, Section 80CCC & Section 80CCD and can be claimed at the time of filing of the income tax return. This article mainly focuses on Deductions allowed under Section 80CCD. For deductions under Section 80C & Section 80CCC, refer the following links:-
- Section 80CCC: Deduction for Contribution for Pension Plan of Insurance Company
- Section 80C: Deduction for Contribution Pension Plan of UTI/Mutual Fund
Deduction under Section 80CCD
Section 80CCD provides for Income Tax deductions for contributions made to the notified Pension Scheme of the Central Govt i.e. for contribution to the National Pension Scheme (NPS). Deduction under this Section is only available to Individuals and not to HUF’s. The Individual claiming deduction under this Section may be Resident or Non-Resident.
Section 80CCD(1): Deduction to NPS Scheme for Contribution by the Individual
Deduction under Section 80CCD(1) is not only available to Salaried Individuals but non-salaried individuals can also contribute to the NPS Scheme and avail deduction for the same.
The maximum amount allowed as a deduction under Section 80CCD(1) is:-
- In case of an employees: 10% of his salary for the financial year (Salary includes Dearness Allowance but excludes all other Allowances and Perquisites)
- In case of non-employees: 10% of the Gross Total Income in the Financial Year (Increased to 20% from Financial Year 2017 onwards)
Amendment vide Budget 2015 in Section 80CCD
Earlier the deduction allowed for contribution to NPS was limited to Rs. 1 Lakh [Sub Section 1A of Section 80CCD]. However, with a view to encourage people to contribute towards NPS, the maximum amount allowed to be invested in National Pension Scheme has been increased from Rs. 1 Lakhs to Rs. 1.5 Lakhs.
Moreover, in the Budget 2015 announced by Arun Jaitley – a new sub-section 1B has also been introduced so as to provide for additional deduction in respect of any amount paid, of upto Rs. 50,000 for contributions made by any Individual assessees under NPS.
This additional benefit of Rs. 50,000 is over and above the benefit of Rs. 1.5 Lakhs allowed to be claimed as a deduction under Section 80C. Therefore, now the total deduction that can be claimed under Section 80C + Section 80CCD = Rs. 2 Lakhs.
Section 80CCD(2): Deduction to NPS Scheme for Contribution by the Employer
In case any employer contributes to the NPS Scheme on behalf of the employee and the benefit of the same would be availed by the employee, the employee would also be allowed a deduction under Section 80CCD(2) for the amount of contribution made by the employer.
The contribution made by the employee himself to the NPS Scheme would be allowed as a deduction under section 80CCD(1) and the contribution made by the employer to the NPS Scheme would be allowed as a deduction under Section 80CCD(2).
The Deduction allowed under Section 80CCD(2) would be allowed for Employers Contribution up to 10% of the Salary of the Individual.
Tax on Amount received back from the National Pension Scheme
The contribution made to the NPS Scheme would be received back by the employee as Pension after retirement or on surrender of the policy (as the case may be).
Budget 2016 Update: On withdrawl from the NPS Account, 40% of the accumulated balance shall be exempt from Tax and the remaining would be taxed as per the Income Tax Slabs in the year of receipt.
Budget 2017 Update: Exemption would also be allowed for partial Withdrawl not exceeding 25% of the Contribution made by the Employee in accordance with the terms and conditions specified under Pension fund Regulatory and Development Authority Act.
- Recommended Read: Computation of Tax on Pension Income
If the amount received by a taxpayer has been used for purchasing an annuity plan in the same year in the year of receipt, the taxpayer would be deemed to have not received any amount from the NPS Scheme and therefore no tax would be levied on the same.