Deduction u/s 80CCD in Current and New Tax Regime and Maximum Exemption Limit for Employer’s Contribution

A new regime of Income Tax for individuals and HUFs was announced in Budget 2020 which is applicable from A.Y. 2021-22 (relevant to F.Y. 2020-21). The concessional slab rates were introduced by insertion of new section 115BAC. However, for taking the benefits of these concessional rates, the assessee has to forego the most of the deductions and exemptions available under the current regime. The person opting for the new scheme has to give up the deduction/ exemption of HRA, LTC, deduction u/s 10AA, standard deduction u/s 16 , professional tax deduction, deduction for interest on housing loan u/s 24, additional depreciation, deduction u/s 35, 35AD and deduction for family pension u/s 57. Further any of the deductions u/c VI-A like 80C, 80D, 80E, 80G except 80CCD(2) and 80JJAA would not be available.

80CCD(2) relates to the deduction of employer’s contribution to New Pension Scheme (NPS). This contribution is firstly added in salary income and later allowed as deduction upto maximum of 10% of salary (14% in case of government employees)

Example: Mr. Jewel earns a basic salary of Rs. 14,00,000 in P.Y. 2020-21. His contribution to NPS deducted from this salary @ 10% of salary was Rs. 1,40,000. Further the employer’s contribution towards NPS @ 12% of salary was Rs. 1,68,000. Mr. Jewel deposited Rs. 90,000/- in his PPF A/c. Calculate the total income and tax payable under both the schemes.

Particulars Current Regime New Regime
Basic Salary 14,00,000 14,00,000
Add: Employer’s Contribution to NPS 1,68,000 1,68,000
Less: Standard Deduction u/s 16 50,000
Gross Total Income 15,18,000 15,68,000
Less: Deduction u/s 80C 90,000
: Deduction u/s 80CCD(1)
(1,50,000 – 90,000)
60,000
: Deduction u/s 80CCD(1B) 50,000
: Deduction u/s 80CCD(2) 1,40,000 1,40,000
Total Income 11,78,000 14,28,000
Tax on Total Income 1,72,536 1,76,280

Notes:

1. Deduction for employee’s own contribution to NPS is allowed as deduction u/s 80CCD(1) to the maximum of 10% of salary. Further a deduction u/s 80CCD(1B) is allowed to the maximum of Rs. 50,000.

2. As per Sec 80CCE, aggregate deduction u/s 80C, 80CCC and 80CCD(1) is restricted to maximum of Rs. 1,50,000. Therefore, in current regime Rs. 90,000 is allowed u/s 80C and employee’s contribution of Rs. 60,000 to NPS is allowed u/s 80CCD(1). The amount of Rs. 50,000 is allowable u/s 80CCD(1B). The balance of Rs. 30,000 (1,40,000 – 60,000 – 50,000) will lapse. However, these deductions are not allowed in new scheme.

3. Deduction for employer’s contribution to NPS u/s 80CCD(2) is allowed upto maximum of 10% of basic salary + DA. Therefore, only Rs. 1,40,000 is allowed as deduction. This deduction is available for both the options.

It is clear from the above example that for employer’s contribution, there is no difference in both alternatives.

The Finance Act 2020 has amended Sec 17, by virtue of which aggregate of employer’s contribution towards provident fund, superannuation fund and pension fund in excess of Rs. 7,50,000 is taxable as perquisites. This change will affect the people with high salaries. This amendment is applicable for both old and new options. Earlier employer’s contribution to provident fund in excess of 12% of salary was taxable, contribution to superannuation fund in excess of Rs. 1.5 Lakh p.a. was taxable and contribution to Pension Fund was fully taxable. However, for pension Fund, deduction upto 10% of salary (14% in case of Government employees) is allowable u/s 80CCD(2).

Now, in Sec 17(2) sub-clause (vii) has been substituted with new sub clause. The earlier sub-clause was relating to the taxation of employer’s contribution to superannuation fund in excess of Rs 1.5 Lakh. The new sub-clause has fixed the upper cap of Rs. 7,50,000 on aggregate basis and the limit of Rs. 1.5 Lakh for superannuation fund has been removed. The government’s rationality for this amendment is that people with high salaries are taking undue advantage of exemption of employer’s contribution. However, this has also led to double taxation of contribution. Let us understand this with help of an example.

Mr. Ahuja, CFO of ABC Ltd. earns basic salary of Rs. 72,00,000 and perquisites of Rs. 6,00,000. He contributed Rs. 2,00,000 to Provident Fund and Rs. 7,20,000 to Pension fund. His employer contributed Rs. 9,50,000 to Provident Fund, Rs. 5,00,000 to superannuation fund and Rs. 8,00,000 to Pension Fund. Calculate his taxable income and tax payable.

Particulars Existing Law After Change
Old Scheme New Scheme
Basic Salary 72,00,000 72,00,000 72,00,000
Perquisites 6,00,000 6,00,000 6,00,000
Excess Employer’s contribution to Provident Fund (9,50,000 – 12% of 72,00,000) 86,000 86,000 86,000
Excess Employer’s contribution to Superannuation Fund (5,00,000 – 1,50,000) 3,50,000
Employer’s Contribution to Pension Fund 8,00,000 8,00,000 8,00,000
Employer’s aggregate Contribution towards provident fund, superannuation fund and pension fund in excess of Rs. 7,50,000 (9,50,000 + 5,00,000 + 8,00,000 – 7,50,000) 15,00,000 15,00,000
Total Salary 90,36,000 1,01,86,000 1,01,86,000
Less: Standard Deduction 50,000 50,000
Gross Total Income 89,86,000 1,01,36,000 1,01,86,000
Less: Deduction u/s 80C 1,50,000 1,50,000
: Deduction u/s 80CCD(1B) 50,000 50,000
: Deduction u/s 80CCD(2) (Maximum 10 % of Basic Salary + DA) 7,20,000 7,20,000 7,20,000
Total Income 80,66,000 92,16,000 94,66,000
Tax Payable 25,53,751 29,48,431 29,48,431

From the above example it is evident that due to amendment, the salary income has increased by Rs. 11,50,000. Further, some part of employer’s contribution is taxed twice. The employer’s contribution to provident fund in excess of 12 % of salary is already taxed and employer’s contribution to pension fund is firstly fully taxed and then deduction u/s 80CCD(2) is allowed only for 10% (14% in case of government employees) of salary. It is again taxable when the aggregate of employer’s contribution exceeds 7,50,000.

Alternatively, it could be understood as that the person has received a total salary of Rs. 1,00,50,000 (72,00,000 + 6,00,000 + 9,50,000 + 5,00,000 + 8,00,000). However, as per the amended law, total salary income is Rs. 1,01,36,000 i.e. Rs. 86,000 is double taxed. Even the lesser amount of deduction (Rs. 7,20,000) for employer’s contribution as compared to addition (Rs. 8,00,000) in salary income is also a kind of double taxation.

Further, any interest, dividend or any other income accreted on this excess portion of employer’s contribution shall also be taxable. In other words, any income earned on the part of employer’s contribution which is included in total income, shall also be taxable. Like in this example Rs.15,00,000 was included in total income. Any income earned on this sum shall also be taxable.

The amendment will affect people with high salary income and increase their tax liability. It may also lead to double taxation, if the contribution by the employer is not properly planned.

CA R.S. Kalra (98889-27000, ca.rskalra@yahoo.com)

CA Jasmeet Singh (86997-01271, jasmeetsingh1699@gmail.com)

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