The 80CCD Confusion: Do You Get Another 100,000 Deduction?

No Comments » Written on July 12th, 2014 by
Categories: Budget2014, TaxSaving

There are many conflicting views on the budget. A certain section - 80 CCD - has been amended, clarifying that it is available to private sector employees as well.

This has been taken many to believe that private sector employees can get an additional Rs. 100,000 if they invest in the New Pension Scheme (NPS). This is incorrect.

I believe that:

  • In fact NPS contributions by individuals will on get tax-free upto Rs. 100,000 (they don’t get the 150,000 increased limit)
  • The contribution by your employer upto 10% of your salary is exempt (regardless of whether you also contribute or not)
  • Your contribution (as in, not your company’s) is clubbed along with the other 80C deductions and has a total deductible amount of (now) Rs. 150,000 overall. I’ll explain.

In my view, what’s happened is:

  • Your personal NPS contributions are restricted to Rs. 100,000 in this budget.
  • Since 80C is now Rs. 150,000, you can fill that remaining 50K by other things (like ELSS, Home Loan Principal, insurance, etc.)

Now, the technical details.

The Original Section

The current section reads like this:

80CCD. (1) Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004, or any other assessee, being an individual 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, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—

(a)  in the case of an employee, ten per cent of his salary in the previous year; and

(b)  in any other case, ten per cent of his gross total income in the previous year.]

(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.

This, was already pretty clear. If you were a self employed or otherwise employed individual, the sub-section (1) allowed you to contribute money into the NPS. (which is the “notified pension scheme” mentioned above). The amount

This has to be read along with Section 80 CCE which says:

80CCE. The aggregate amount of deductions under section 80C, section 80CCC and  sub-section (1) of section 80CCD shall not, in any case, exceed one lakh rupees.

Meaning: Everything put together that YOU contribute (not your employer) is clubbed together, and gets an aggregate limit of Rs. 100,000.

How much of your NPS contribution was exempt?

  • Your actual NPS contribution upto 10% of base salary (plus DA) for employees, or 10% of gross income for the self-employed
  • Plus, any amount your employer invests (upto 10% of salary).

Meaning, if you earned Rs. 100,000 a month, and you contributed Rs. 10,000 to the NPS, and your employer contributed another Rs. 10,000, then:

  • Your Rs. 10,000 a month - or Rs. 120,000 a year qualifies, but because of 80CCE, only 100,000 is exempt (and you don’t get to deduct anything else from the 80C type of investments) 
  • Your employer’s contribution of Rs. 120,000 a year was exempt (and effectively, not counted as your income). This has no limits, but you have to show the 120K as income, and claim it as a deduction.

What’s Changed?

The finance bill changes the 80C, and 80CCE limit to Rs. 150,000. But it also changes the 80 CCD section like this:

28. In section 80CCD of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2015,––
(i) for the words, figures and letters “Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004”, the words, figures and letters “Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or, being an individual employed by any other employer”
shall be substituted;
(ii) after sub-section (1), the following sub-section shall be inserted, namely:––
(1A) The amount of deduction under sub-section (1) shall not exceed one hundred thousand rupees.”.

The first part basically clarifies that you can be employed anywhere. (In fact you can even be self employed, because the “or any other individual” continues to stay).

The second part is critical. It says that amount YOU contribute (which is what is subsection(1) is) is only deductible upto Rs. 100,000.

Clearly:

  • There is no ADDITIONAL investment deduction under 80CCD for your own contribution.
  • This deduction, remains locked for your own NPS contributions upto Rs. 100,000 only.
  • If you invest that, then you get another 50,000 deduction for investing other 80C type assets
  • If you don’t invest in NPS, you still get the 150,000 to invest in 80C type of assets

And NPS is Taxed on Exit

NPS contributions may be exempt, but they are one instrument where exits are taxed. Whatever money you received - whether as a lumpsum or a pension - is added to your income and taxed accordingly.

So in that context, a Provident Fund is better - since there is no taxation on exit. Hopefully a future finance minister won’t change that!

How You Can Still Benefit

You can tell your employer to put 10% of your salary into the NPS into your account, but you should only contribute the minimum (Rs. 12,000 per year). You can then use the rest of the 138,000 to do the other 80C investments - like PPF or ELSS funds or such.

The employer’s contribution is exempt and taxable only on exit. Then, you wait until some finance minister gets itchy and makes NPS exits tax free. Which will happen when some senior tax officials begin to retire (I would imagine around 2020). Then you can get out tax-free also.

This could have been done last year also - it’s not anything new in this budget. Until NPS exits are made exempt, they compare poorly with a PPF.

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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

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