Deductions under Section 80CCD(2) of Income Tax Act

Section 80CCD(2) of the Income Tax Act gives a tax benefit to employers when they contribute to their employees’ NPS (National Pension Scheme) accounts. Please note that this section is different from the benefits employees receive. Here, the tax benefit is for the employer.

If a company adds money to an employee’s NPS account, the company can claim that amount as a deduction from its taxable income. However, the company can only claim this deduction up to 20% of its total income in the previous financial year.

Section 80CCD(2) of the Income Tax Act allows for an additional deduction on contributions made by an employer towards an employee's National Pension System (NPS) account. Under this section, if an employer contributes to the employee's NPS account, the employee can claim a deduction for the amount contributed. The maximum deduction allowed under this section is 14% of the employee's salary (Basic + DA) for central government employees and 10% for other employees, over and above the limit of Rs. 1.5 lakh available under Section 80C.

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To avail the benefits under Section 80CCD(2), certain conditions must be met:

• Employer contribution: The deduction is applicable only on the employer's contribution to the employee's NPS account. Employee contributions are covered under Section 80CCD1.
• Limit on contribution: There is no specific upper limit on the employer's contribution eligible for deduction under Section 80CCD(2). However, it is crucial to note that the overall limit under Section 80CCD (1) and (2) combined is 10% of the employee's salary.
• Type of employer: The deduction is available to both private and government employees, making it inclusive across sectors.
• Employee tenure: The employee should be in the continuous service of the employer during the financial year in which the contribution is made.
• Mode of contribution: The employer's contribution must be directly deposited into the employee's NPS account.

80CCD and New Tax Regime u/s 115BAC

As you already know, under the Income Tax Act, there are two tax regimes:

• The old tax regime, which allows many deductions and exemptions
  and

• The new tax regime (under Section 115BAC), which offers lower tax rates but allows only a few specific deductions

If you invest in the NPS, the tax benefit you can claim depends on your choice of tax regime. The two main sections that deal with NPS deductions are:

• Section 80CCD(1) for the taxpayer’s own contribution
  and

• Section 80CCD(2) for the employer’s contribution.

Let’s see how these two apply under each regime:

Section 80CCD(1)

• Section 80CCD(1) of the Income Tax Act gives a tax deduction to individuals who contribute to the NPS.
• This benefit is available only if you choose the old tax regime.
• It applies to all Indian citizens who are between 18 and 70 years old and are making contributions to NPS.
• This section also covers Non-Resident Indians (NRIs).
• Please note that the deduction limit depends on whether you are a:
  • Salaried employee
    or
  • Self-employed

Let’s understand how much you can claim under this section through the table below:

Be aware that this deduction is included within the overall Rs. 1.5 lakh limit under Section 80C, which also includes other investments like PPF, LIC, ELSS, etc.

Additional Deduction u/s 80CCD(1B)

Section 80CCD(1B) allows an extra tax deduction of up to Rs. 50,000 for contributions made to the NPS. This deduction is:

• Available only under the old tax regime
  and

• In addition to the Rs. 1.5 lakh limit under Sections 80C, 80CCC, and 80CCD(1)

Thus, if you invest more in NPS (beyond Rs. 1.5 lakh), you can also claim an additional deduction of up to Rs. 50,000 under Section 80CCD(1B). So, you can reduce your taxable income by up to Rs. 2 lakh in one financial year.

Section 80CCD(2)

• This section provides an extra tax deduction for salaried individuals when their employer contributes to their NPS account.

• It does not apply to self-employed individuals.

• This deduction is separate from the Rs. 1.5 lakh limit under Section 80C and Section 80CCD(1).

• The employer can contribute an amount equal to or more than what the employee contributes to NPS.

• Contributions under Section 80CCD(2) are allowed in addition to employer contributions to PPF or EPF.

• The deduction limit depends on whether the employer is the Central/ State Government or a private employer.

This deduction is allowed under both the old and new tax regimes, but the percentage limit differs based on the employer type. Let’s understand how through the table below:

National Pension Scheme under 80CCD

• NPS is a government-backed retirement savings plan.

• It is available to:

  • Self-employed individuals

  • Private sector employees

  • Government employees

• Through regular contributions, you can build a retirement fund.

• You can contribute to NPS until the age of 70.

• For Central Government employees, joining NPS is mandatory. For others, it is optional.

Please note that there are two types of NPS Accounts:

Atal Pension Yojana (APY) under 80CCD

• APY is a government pension scheme.
• It provides a guaranteed monthly pension after retirement.
• This scheme is mainly meant for workers in the unorganised sector.
• You can claim tax deductions on investments in APY up to Rs 1,50,000 per year under Section 80CCD(1).
• If you are self-employed, you can claim a deduction of up to 20% of your annual income, but the maximum deduction cannot be more than Rs. 1,50,000 under this section.
• You can also claim an additional tax deduction of up to Rs. 50,000 for APY investments under Section 80CCD(1B).
• This deduction is available in addition to the Rs 1,50,000 limit under 80CCD(1).

• Verification of contribution: Employees should regularly verify that the employer has deposited the NPS contribution in their account. It is advisable to keep track of these contributions for future tax filings.
• Understanding the limits: While there is no specific limit on the employer's contribution under Section 80CCD(2), the combined limit with Section 80CCD(1) is 10% of the employee's salary.
• Periodic review of NPS account: Employees should periodically review their NPS accounts to ensure that the contributions are being credited, and the account is performing optimally.

Claiming the deduction under Section 80CCD(2) involves a systematic approach during the tax return filing process. Employees should:

• Collect the necessary documents: Ensure that you have the necessary documents, such as salary slips and Form 16, which provide details about the employer's NPS contribution.
• Verify employer's contribution: Cross-verify the amount of the employer's contribution to the NPS account. This can be done by checking the salary slips or communicating with the HR department.
• Include in the tax return: When filing your Income Tax Return, provide the relevant details about the employer's contribution to the NPS account. This usually involves entering the amount in the specified section dedicated to NPS deductions.
• Stay informed: Regularly update yourself on any changes in tax laws or guidelines related to Section 80CCD(2) to ensure compliance and maximise benefits.

Here are the important points to consider for Section 80CCD(2):

• Employer contribution: The deduction is applicable only on the contribution made by the employer towards the employee's National Pension System (NPS) account.
• Limit: The maximum deduction allowed is 14% of the employee's salary (Basic + DA) for central government employees and 10% for other employees.
• Additional benefit: This deduction is over and above the Rs. 1.5 lakh limit available under Section 80C.
• No upper limit: Unlike Section 80C, there is no upper limit on the amount that can be claimed as a deduction under Section 80CCD(2).
• Taxable: The employer's contribution is taxable in the hands of the employee as perquisite, but the deduction can be claimed on the same amount under Section 80CCD(2).
• NPS account: The contribution should be made to the employee's NPS Tier-I account to be eligible for this deduction.
• PAN requirement: Providing PAN details to the employer is mandatory to avail of this deduction.

In conclusion, Section 80CCD(2) serves as a valuable tool for employees to enhance their retirement savings, with the added benefit of tax deductions. It is essential for both employers and employees to understand and leverage the provisions of this section for effective financial planning.

80CCD(1), 80CCD(1B) and 80CCD(2) - A Comparative Analysis

Section 80CCD(1), 80CCD(1B), and 80CCD(2) provide tax deductions for contributions made to the NPS. Each section has different rules based on who is contributing and under what conditions.

Let’s gain more clarity through the comparative analysis below:

Terms and Conditions for Deductions u/s 80CCD

Section 80CCD provides tax deductions for contributions made to NPS. This section applies to both government employees and other individuals. However, there are several rules and limits that must be followed carefully.

Let’s check them out:

• Contributions to NPS are compulsory for government employees. For other individuals, it is optional.
• The total tax deduction allowed under Section 80CCD is Rs. 2,00,000. This includes: 
  • Rs. 1,50,000 under Section 80CCD(1)
    and
  • Rs. 50,000 additional under Section 80CCD(1B)
     
• Deductions claimed under Section 80CCD cannot be claimed again under Section 80C. The combined limit for both sections is Rs 2,00,000.
  
• Any money received from NPS as a monthly pension or when closing the account is taxable according to the tax laws in force.
• If you reinvest the amount received from NPS into an annuity plan, that amount is completely tax-free. However, you must show proof of payment to claim this exemption.

Differences Between Section 80CCD(1) and 80CCD(2)

Section 80CCD(1) and Section 80CCD(2) both provide tax benefits for contributions to the National Pension System (NPS), but they differ in terms of eligibility, contribution source, and deduction limits.

• Section 80CCD(1): This applies to both salaried and self-employed individuals contributing to NPS. The maximum deduction allowed is 10% of salary (basic + DA) for salaried employees and 20% of gross income for self-employed individuals, subject to an overall limit of ₹1.5 lakh under Section 80C.
• Section 80CCD(2): This is applicable only to salaried employees where the employer contributes to the NPS on their behalf. The deduction limit is up to 10% of salary (basic + DA) for private sector employees and 14% for government employees, over and above the ₹1.5 lakh limit of Section 80C.

While Section 80CCD(1) is a voluntary contribution by the individual, Section 80CCD(2) is an additional benefit provided by the employer.