Section 80CCD(2)

What is Section 80CCD(2)?

Section 80CCD(2) is a subsection under the Income Tax Act, 1961 that offers tax benefits to salaried individuals on contributions made by their employer to the National Pension System (NPS). Under this section, the tax benefit is for the employer.

Key Features of Section 80CCD(2):

• Applicable Only to Salaried Individuals: This benefit is not available to self-employed persons.
• Employer's Contribution: Tax deduction is allowed for contributions made by the employer to the employee's NPS account.
• Deduction Limit:
  • Up to 10% of the salary (Basic + Dearness Allowance) for private sector employees.
  • Up to 14% of the salary for Central Government employees (effective from FY 2019–20).
• Over and Above ₹1.5 Lakh Limit: The deduction under Section 80CCD(2) is over and above the ₹1.5 lakh limit under Section 80C/80CCE. This means it can help claim additional tax benefits.
• No Monetary Cap: Unlike Section 80CCD(1), there's no upper monetary limit in Section 80CCD(2), but it is capped as a percentage of salary.

Example:

If your basic + DA is ₹10 lakh per annum and your employer contributes 10% (i.e. ₹1 lakh) to NPS, you can claim this ₹1 lakh as a deduction under Section 80CCD(2), in addition to ₹50,000 under Section 80CCD(1B) and ₹1.5 lakh under Section 80C.

What is the Eligibility Criteria for Deductions Under Section 80CCD(2)?

Here is the eligibility criteria for deductions under Section 80CCD(2):

• Employer's Contribution Only: The deduction under Section 80CCD(2) is available only on contributions made by the employer to the employee's NPS account. Contributions made by the employee are covered under Section 80CCD(1).
• Applicable to Salaried Individuals: This benefit is available to both government and private sector employees, making it accessible across employment types.
• Limit on Deduction: While there is no fixed upper monetary limit, the employer's contribution eligible for deduction should not exceed 10% of the employee's salary (Basic + DA). For Central Government employees, this limit is 14%.
• Employment Tenure: The employee must be in continuous service with the employer during the financial year in which the contribution is made to be eligible for the deduction.
• Direct NPS Contribution: The employer's contribution must be directly deposited into the employee's NPS account to qualify for the tax benefit.

Section 80CCD Under Old and New Tax Regime

Let's see how Section 80CCD(1) and Section 80CCD(2) apply under each regime:

Maximising Tax Savings Through National Pension Scheme (NPS) Under Section 80CCD

The National Pension Scheme (NPS) is a government-backed retirement savings plan aimed at building a secure financial future. Here's how you can maximise tax savings through NPS:

• Eligibility: Available to self-employed individuals, private sector employees, and government employees.
• Contribution Age Limit: You can contribute to NPS until the age of 70.
• Mandatory for Central Govt. Employees: NPS is compulsory for Central Government employees, while it remains optional for others.
• Tax Benefits:
• Section 80CCD(1): Deduction up to ₹1.5 lakh (part of Section 80C limit).
• Section 80CCD(1B): Additional deduction of ₹50,000.
• Section 80CCD(2): Deduction on employer's contribution (up to 10% or 14% of salary).

Types of NPS Accounts

Atal Pension Yojana Under Section 80CCD of the Income Tax Act

The Atal Pension Yojana (APY) is a government-backed pension scheme designed primarily for workers in the unorganised sector, such as daily wage labourers, street vendors, and small-scale service providers. It aims to provide a guaranteed monthly pension after retirement, ensuring financial security in old age.

Here's how you can avail tax benefits under Section 80CCD through APY:

• Tax Deduction Under Section 80CCD(1):
  Investments made in APY qualify for tax deductions up to ₹1.5 lakh per year under this section.
• If you're self-employed, you can claim a deduction of up to 20% of your annual income, limited to ₹1.5 lakh.
• Additional Deduction Under Section 80CCD(1B):
  You can also claim an additional deduction of ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit.

How to Make Claims Under Section 80CCD(2)?

• Collect salary slips and Form 16 to check the employer's NPS contribution.
• Verify the contribution amount through payslips or by contacting HR.
• While filing your ITR, enter the employer's contribution in the NPS deduction section.
• Stay updated on any changes in tax rules related to Section 80CCD(2).

Difference Between 80CCD(1), 80CCD(1B) and 80CCD(2)

What is the Difference Between Section 80CCD(1) and 80CCD(2)?

Conclusion

Section 80CCD(2) is a strategic way to enhance your retirement savings and enjoy extra tax relief without any additional financial burden, since the contribution is made by your employer. By staying aware of your NPS contributions and properly claiming them while filing taxes, you can make the most of this. It's a smart inclusion in your overall tax planning strategy, especially for those looking to optimise savings with minimal effort.

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