Section 80CCD of ITA, 1961 : Section 80Ccd: Deduction In Respect Of Contribution To Pension Scheme Of Central Government

Explanation using Example

Let's say Mr. Sharma is a government employee who joined service on January 15, 2004. In the financial year 2022-2023, his salary, including dearness allowance (as per his terms of employment), amounts to INR 10,00,000. Mr. Sharma decides to contribute to the National Pension System (NPS), which is a pension scheme notified by the Central Government.

Under Section 80CCD(1), Mr. Sharma can claim a deduction for his contribution to the NPS. The maximum deduction he can claim is 10% of his salary, which is INR 1,00,000 (10% of INR 10,00,000).

Additionally, Mr. Sharma decides to contribute an extra INR 50,000 to his NPS account. Under Section 80CCD(1B), he can claim a separate deduction for this additional contribution, which is capped at INR 50,000.

Now, suppose the Central Government also contributes INR 1,00,000 to Mr. Sharma's NPS account in the same year. As per Section 80CCD(2), Mr. Sharma can claim a deduction for the government's contribution, which is limited to 10% of his salary, so this entire amount is deductible.

Therefore, for the financial year 2022-2023, Mr. Sharma can claim a total deduction of INR 2,00,000 (his contribution under 80CCD(1) + government's contribution under 80CCD(2)) plus an additional INR 50,000 under 80CCD(1B), making the total deduction INR 2,50,000 from his taxable income.

If Mr. Sharma receives any amount from the NPS account upon opting out or closure, as per Section 80CCD(3), it will be taxable in the year of receipt. However, if the amount is used to purchase an annuity plan in the same year, as per Section 80CCD(5), it will not be considered as income for that year.