The Income Tax Act 1961 is the most significant piece of tax legislation in India. It is a comprehensive code enumerating the various provisions regarding taxation of individuals, companies, firms and other entities. Section 80CCD of the Income Tax Act, 1961 deals with the Deduction for Investment in Pension Fund. The main objective of this Section is to provide tax benefits to an employee for making contributions towards provident or pension fund. This section helps to make retirement planning easier for the taxpayers by providing them deduction for investment in pension funds.
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Section 80CCD of the Income Tax Act, 1961
Section 80CCD of the Income Tax Act, 1961 comes under Chapter VI-A which deals with deductions from total income. The section provides deduction for the amount paid or deposited by an individual in the notified pension scheme. The maximum allowance under this section is Rupees one hundred and fifty thousand per annum.
Eligibility for deduction under Section 80CCD
The individual making the contribution should either be a resident Indian or a Non-resident Indian (NRI). The employer nor the employee should have to get any financial benefit due to contributions made under this section. The individuals who are self-employed and salaried are eligible to avail the deduction under this section.
Limit on Contribution for Eligibility for deduction under Section 80CCD
Under this section, the total amount of contribution made by an individual should not exceed more than 10% of their salary. Both employer and employee can make contribution to the pension fund. The employer’s contribution should not exceed 10% of employee’s salary. If the employee does not have a salary or does not have income in the relevant financial year, the contribution made by him can be upto 20% of his gross total income.
Tax Benefit under Section 80CCD
Under Section 80CCD of the Income Tax Act, 1961 tax deduction of Rs 1.5 lakhs is allowed for all investments in notified pension funds. In addition, any employer’s contribution up to 10% (independent of the amount deducted by employee u/s 80CCD) is also eligible for deduction. However, the amount should not exceed 10% of the total salary of the employee. This implies that the maximum deduction under this section can be up to Rs 2 lakhs.
Taxpayers may also avail additional tax benefits to the extent of Rs 50,000 under Section 80CCD(1B) of the Income Tax Act. This exemption is over and above the limit of Rs 1.5 lakhs. The additional deduction is subject to the limit of 10% of the income of employee.
Income not to be considered for calculation of Section 80CCD deduction
The following list provides information about the different categories of income that are exempt from tax deduction under this section:
1 Interest earned from investments made by the employee
2 Amount received by the employee in form of gratuity
3 Amount received by the employee in form of commutation
4 Any disability allowances
5 Any leave salary amount
6 Any transport allowance
7 Any major illness allowance
8 Retrenchment compensation amount
9 Any special allowance
Conclusion
Section 80CCD of the Income Tax Act, 1961 provides an opportunity to the taxpayers to save tax by making investments in notified pension funds. The section allows tax deductions up to Rs 2 lakhs for all contributions made to the pension funds. Taxpayers can avail the additional deduction of Rs 50,000 over and above the maximum limit provided in the section. The section helps to make the retirement planning easier for the taxpayers. It allows them to save taxes, generate wealth and plan for their future.
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