Additional Income Tax Exemption under Section 80 CCD (1) for contribution in NPS

Additional Income Tax Exemption under Section 80 CCD (1) for contribution in NPS announced in Budget 2015-16

Apart from increase in Income Tax exemption limit under Section 80 D for Health Insurance Premium and enhanced exemption limit for Transport Allowance, Salaried Employees coming under NPS will get additional Income Tax Exemption in the Financial Year 2015-16, if they contribute in excess of Rs. 1,00,000 in NPS.

Section 80 CCD (1) : Provision meant for deduction of own contribution in NPS from total income. Limit provided under this Section has been increased from Rs.1,00,000/- to Rs. 1,50,000/-

Finance Bill 2015-16 provides that a tax payer can avail Income Tax Exemption under Section 80 CCD(1) by way of deduction of contribution made by him/her in National Pension System (NPS) up to Rs. 1,50,000.

This new change in Section 80CCD (1) by introducing an additional sub section in the form of sub section 1B to Section 80CCD and by deleting existing sub section 1A, provides for additional exemption / deduction from total income to extent of Rs. 50,000 over and above limit of Rs. 1.50 lakh imposed by Section 80CCE (for the purpose of allowing deduction under Section 80C, 80CCD(1) and Section 80CCC)

But Who will really be benefited by this additional Deduction / Exemption under Section 80CCD (1B)?

Individuals who are self employed and allowed to contribute 10% of their gross total income in NPS and tax payers who contribute up to Rs.1,50,000 in Tier 1 account in a year towards NPS by virtue of their higher salary will be benefited by this additional limit.

In other words, those who earn less than Rs.15 lakh in a year and contribute in 10% of their salary in NPS Tier 1 account will be benefited under Section 80 CCD (1) only up to the value of the yearly contribution made by them in NPS and it would be less than Rs. 1.5 lakh

Note on amendment / Omission relating to Section 80CCD in Finance Bill 2015

Clause 17 of the Bill seeks to amend section 80CCD of the Income-tax Act relating to deduction in respect of contribution to pension scheme of Central Government.

The existing provisions contained in sub-section (1) of section 80CCD, inter alia, provides that in the case of an individual, employed by the Central Government on or after 1st January, 2004, or being an individual employed by any other employer or any other assessee being an individual who has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, a deduction of such amount not exceeding ten per cent. of his salary is allowed.

It is proposed to omit sub-section (1A) and insert a new sub-section (1B) so as to provide that an assessee referred to in sub¬section (1), shall, be allowed an additional deduction in computation of his total income, of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees. It is also propose to provide that no deduction under this sub-section shall be allowed in respect of the amount on whcih deduction has been claimed and allowed under sub-section (1).

Consequential amendments have been proposed in sub-section (3) and sub-section (4) of section 80CCD.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Provisions of Finance Bill 2015 that seeks amendment / Omission relating to Section 80CCD

17. Amendment of section 80CCD.

In section 80CCD of the Income-tax Act, with effect from the 1st day of April, 2016,-—

(a)      sub-section (1A) shall be omitted;

(b)      after sub-section (1A), as so omitted the following sub-section shall be inserted, namely:—

“(1B) An assesse referred to in sub-section (1), shall be allowed a deduction in computation of his total income, [in addition to the deduction allowed under sub-section (1)], of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees:

Provided that no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1);

(c) in sub-section (3),—

(I)       for the words, brackets and figure, “sub-section (1)”, wherever they occur, the words, brackets, figures and letter “sub-section (1) or sub-section (1B)” shall be substituted;

(II)      for the words “under that sub-section”, the words “under those sub-sections” shall be substituted;

(d) in sub-section (4), for the words, brackets and figure, “sub-section (1)”, the words, brackets, figures and letter “sub-section (1) or sub-section (1B)” shall be substituted.
Section 80 CCD (2) : Though there is no change as far as Section 80 CCD(2) this section finds mention here as this is an Income Tax Exemption that a NPS Employee gets for the contribution made by Govt / employer.  It provides for Income Tax Exemption with no limit for 10% of Salary consisting of basic pay and Dearness Allowance if any contributed by an employer in NPS Tier 1 Account.

The more attractive feature of this deduction provision is that it is not limited by overall exemption limit of Rs. 1.50 lakh under Section 80 CCE of Income Tax Act. In other words, deduction for contribution made by an employer towards NPS Tier 1 account will be allowed in addition to Rs. 1.50 lakh exemption limit under Section 80 CCE.