The 80CCD confusion: Do you get another Rs 1 lakh deduction? Plus All in One TDS on Salary for Govt & Non-Govt employees for FY 2014-15
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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.
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.
·
In fact NPS contributions by individuals will on get tax-free upto
Rs 100,000 (they don’t get the Rs 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.”.
(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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