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What is Section 80CCD, Contributions to Pension Schemes?
Section 80CCD provides tax deductions for individuals who contribute to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). This section also covers employer contributions made to the NPS.
Who is eligible to claim Deduction on Contributions to Pension Schemes u/s 80CCD?
Individuals are eligible to claim a deduction on contributions to pension schemes u/s 80CCD.
What is covered under 80CCD(1) & 80CCD(2) of income tax act?
Section 80CCD is further categorized into two subsections:
80CCD(1): This applies to contributions made by the individual (whether salaried or self-employed) to the National Pension Scheme (NPS).
80CCD(2): This applies to contributions made by the employer to the NPS.
What is Budget 2024 - Update related to 80CCD?
Rise in Deduction Limit for Employer Contributions to Pension Plans
Under the proposed amendments in the Finance Bill 2024, the deduction for employer contributions to the pension scheme (under section 80CCD(2)) has been raised from 10% to 14% of salary (including dearness allowance) for non-government employers. However, this change applies only to taxpayers opting for the new tax regime under Section 115 BAC.
What is the eligibility for deductions on contributions to pension schemes under section 80CCD for the new tax regime?
As per the new tax regime, only certain exemptions and deductions are allowed. The following is an analysis of the deductions available under 80CCD(1) and 80CCD(2).
80CCD (1): Taxpayer?s contribution to NPS
New Tax Regime: Not applicable
Old Tax Regime: Applicable
80CCD(2): Employer's contribution to NPS
New Tax Regime: Available
Old Tax Regime: Available
What is Section 80CCD(1) related to contribution to NPS?
This subsection outlines the rules for the income tax deduction available to taxpayers for their contributions to the NPS. It applies regardless of whether the contributor is a government employee, a private employee, or a self-employed individual. The provisions of this section are applicable to all Indian citizens aged between 18 and 70 years who contribute to the NPS.
Is Section 80CCD(1) applicable to NRIs related to contribution to NPS?
Yes, NRIs contributing to NPS can claim deduction under this Section.
What is the Deduction limit u/s 80CCD(1) related to contribution to NPS?
Following is the Deduction Limits u/s 80CCD(1) related to contribution to NPS:
1. Employees: The maximum deduction allowed for employees is 10% of their salary (basic + DA) from the previous year.
2. Self-Employed: For self-employed individuals, the maximum deduction is 20% of their gross total income from the previous year.
Note: The overall deduction limit under 80CCD(1) is capped at Rs. 1.5 lakhs for a financial year.
What is the additional limit under Section 80CCD(1B) related to contribution to NPS ?
Section 80CCD(1B) offers an additional deduction of up to Rs. 50,000 for contributions to the NPS, over and above the deductions available under Section 80CCD(1), for individuals who choose the old tax regime.
The combined limit under Section 80CCE, which includes the deductions under Sections 80C, 80CCC, and 80CCD(1), is capped at Rs. 1.5 lakh. The Rs. 50,000 deduction under Section 80CCD(1B) is in addition to this Rs. 1.5 lakh limit.
Therefore, the maximum deduction available under Section 80CCD can be up to Rs. 2 lakh (Rs. 1.5 lakh + Rs. 50,000).
What is Section 80CCD(2) related to employer's contribution to the NPS?
Under Section 80CCD(2), a deduction is available for the employer's contribution to the NPS.
An employer can contribute to the NPS in addition to contributions made towards PPF and EPF. The employer's contribution can be equal to or greater than the employee's contribution.
What is the applicability of Section 80CCD(2) employer's contribution to the NPS?
Section 80CCD(2) is applicable only to salaried individuals and not to self-employed individuals. The deductions under this section can be claimed in addition to those available under Section 80CCD(1).
What is the Deduction limit under Section 80CCD(2) employer's contribution to the NPS?
Section 80CCD(2) allows a salaried individual to claim the following deductions:
1. Central Government or State Government Employer: Up to 14% of their salary (basic + DA).
2. Any other employer:
Under the old tax regime: A maximum deduction of 10% of salary (basic + DA).
Under the new tax regime: A maximum deduction of 14% of salary (basic + DA)
(This 14% rate has been increased from 10% effective from FY 2024-25).
What do you mean by the National Pension Scheme under 80CCD?
Here are some key highlights of the NPS:
1. Contributions to the NPS must be made until the age of 70. While it is mandatory for Central Government employees, it is voluntary for other individuals.
2. To qualify for income tax deductions under the NPS Tier 1 account, a minimum annual contribution of Rs. 6,000 or Rs. 500 per month is required.
3. To qualify for income tax deductions under the NPS Tier 2 account, a minimum annual contribution of Rs. 3,000 or Rs. 250 per month is required.
4. Various investment options are available, including equity funds, government bonds, and government securities.
5. Partial withdrawals of up to 25% of the individual's contribution are allowed, subject to certain conditions.
6. Individuals can withdraw up to 60% of the corpus as a lump sum and must invest the remaining 40% in an annuity plan.
It is considered one of the most affordable equity-linked investment options available in the market.
What are the Terms & Conditions to claim Deduction under Section 80CCD related to NPS?
The following are the terms and conditions governing the deductions under Section 80CCD:
Deductions under Section 80CCD are available to both salaried and self-employed individuals. While it is mandatory for government employees, it remains voluntary for others.
The maximum deduction limit under Section 80CCD is Rs. 2 lakhs, which includes the additional Rs. 50,000 deduction available under Section 80CCD(1B).
Tax benefits under Section 80CCD cannot be claimed again under Section 80C. Therefore, the combined deduction under Sections 80C and 80CCD cannot exceed Rs. 2 lakhs.
Any income received from the NPS, such as monthly payments or amounts from surrendered accounts, will be subject to taxation according to applicable provisions.
Amounts reinvested in an annuity plan from the NPS are fully exempt from taxation.
The deductions available under Section 80CCD can be claimed when filing your income tax returns at the end of the financial year, provided proof of payment is submitted.
How to calculate Deduction under Section 80CCD related to NPS contribution?
Let's consider an example where an individual is contributing to the NPS.
Assumptions:
Employee's Salary (Basic + DA): Rs. 8,00,000
Employee's Contribution to NPS (Section 80CCD(1)): Rs. 40,000
Employer's Contribution to NPS (Section 80CCD(2)): Rs. 50,000
Additional Contribution under Section 80CCD(1B): Rs. 50,000
Total Deduction Calculation
Employee's Contribution (80CCD(1)): Rs. 40,000
Employer's Contribution (80CCD(2)): Rs. 50,000
Additional Contribution (80CCD(1B)): Rs. 50,000
Total Deduction (80CCD) = Rs. 1,40,000
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