Section 80CCD(1) & 80CCD(2): Deduction for Contribution to NPS

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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
As per Section 80CCE, the total maximum deduction allowed under Section 80C, Section 80CCC & Section 80CCD(1) is limit to Rs. 1 .5 Lakh. This is a combined aggregate deduction of Rs. 1.5 Lakh and no separate deduction has been prescribed for each of these sections. The Individual can choose to invest under any of these sections subject to an aggregate total deduction limit of Rs. 1.5 Lakh.

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).
There is a maximum limit for deduction for contribution made by the Individual himself under Section 80CCD(1) as mentioned above. But for contribution made by the employer to the NPS Scheme for benefit of employee, there is no maximum limit for deduction allowed under Section 80CCD(2). The Deduction under Section 80CCD(2) is over and above the deduction of Rs. 1 Lakh under Section 80C + Section 80CCC + Section 80 CCD(1)

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). The amount so received as Pension or on closure of the NPS Account either by the individual himself or by the nominee which has earlier been claimed as a deduction under Section 80CCD, would be regarded as Income in the hands of the recipient and would be taxed as per the Income Tax Slabs in the year of receipt.
  • 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.

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