Income Tax Act, 1961 provides various tax deductions under Chapter VI-A for contribution to pension plans. Such deductions are available u/s 80C, 80CCC and 80CCD. This guide talks about section 80CCD.
This section provides tax deductions for contribution to the pension schemes notified by Central Government, i.e., National Pension Scheme (NPS) & Atal Pension Yojana (APY). There are two parts or sub-sections of this section namely – section 80CCD(1) & section 80CCD(2).
This part applies to all the individual tax payers who are employed by the Central Government/any other employer or any other individual assessee. All citizens of India between the ages of 18 and 60 years can contribute to NPS on a voluntary basis. An NRI can also contribute to NPS. This Scheme can be participated in addition to PPF and EPF.
Under this section, maximum deduction allowed is:
- up to 10% of salary for salaried employee
- and 10% of gross income for other taxpayer who is not under salaried employment
Part (1B) provides additional deduction of Rs. 50,000 for contribution made by an assessee under NPS.
Note: The maximum deduction as an aggregate of section 80C,80CCC & 80CCD(1) should not exceed Rs. 1,50,000 but after including section 80 CCD(1B), total deduction limit becomes Rs. 2,00,000.
Here salary means (basic pay + dearness allowance)
Deduction is also allowed to an employee if his employer makes contribution to employee’s account in the pension scheme of Central Government. The deduction allowed here for employer’s contribution is up to 10% of the salary of the individual.
Taxability of amount received back from the National Pension Scheme & Atal Pension Yojana
40% of the payment received from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD shall be exempt u/s 10(12A).
Balance 60% will be taxable, but if the same is used for purchase an annuity plan, then it shall not be considered as income of individual at the time of closure of the account.
Further the periodic pension/annuity received from such annuity plan will be includible in the taxable income in the year of receipt and taxable accordingly. So in a sense by purchasing an annuity plan one can defer the tax liability or avoid/reduce the tax if he is not expected to have significant taxable income post retirement in future.
In case of death of account holder, the amount received by nominee of departed on closure of account is exempt from tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Before making any decisions do consult your Professional / tax advisor. For misrepresentation or interpretation of act or rules Author does not take any responsibility. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on. The author is a Chartered Accountant and the Chief Gardener & Founder Director of Rajput Jain & Associates , a leading Tax & Investment Planning Advisory Service Provider.
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