Let’s understand this with an illustration. Let’s say Mr. Arun is a central government employee and he contributes Rs. 50,000 to his pension fund. His salary structure is as below:

Basic Salary – Rs. 1,80,000

Dearness allowance – Rs. 80,000

Other Allowances and Perquisites taxable – Rs.1,00,000

Investments under Section 80C – Rs.1,00,000

Now, he can claim only Rs. 26,000 (10% of basic and dearness allowance) under Section 80CCD (1)

Section 80CCD (2)

An employer can also contribute to employees’ pension fund under the corporate model of National Pension Scheme. Contributions can be structured in three ways.

• Employer can make a contribution which is equal to the employee’s contribution
• Employer can also contribute lower or higher than that of the employee’s contribution
• Only employer can also make contribution on behalf of an employee

On a taxation front, both employer and employee can be benefited by these contributions. Employer can claim a tax benefit by showing his part of contribution as business expense in the profit and loss account. An Employee can avail a benefit of tax deduction in case his/her employer contributes to the pension scheme on behalf of them. If an employer makes a contribution to the new pension scheme on the behalf of an employee, then that employee can claim a tax deduction for such contributions under Section 80CCD (2) of the Income Tax Act, 1961.

Maximum eligible amount of deduction is least of below three conditions

• Contribution made by employer towards pension scheme
• 10 % of individual’s annual salary (basic + dearness allowance)
• Gross total income

This eligible deduction is over and above the limit of Section 80C. Self-employed are not eligible for this deduction. It applies to only salaried individuals.

For Example, let’s say your annual salary is Rs. 11 lakh. Suppose, your contribution to National Pension Scheme is Rs. 75,000 in a financial year, then you are allowed to claim tax deductions under Section 80CCD (1). You taxable income will be reduced to Rs. 10.25 lakh (11 lakh – 75,000) after the deduction. Let’s say, your employer also contributes to your national pension scheme account in equal proportion i.e. 75,000 in a financial year, then you claim a deduction for that additional amount as well under Section 80CCD (2). Your taxable income will then be reduced to 9.5 lakh (11-1.5).  However, the aggregate amount of tax deduction under Sections 80C, 80CCC and Section 80CCD cannot exceed Rs. 1.5 lakh

Section 80CCD (1B)

This is a new sub section inserted to encourage people to invest more in the National Pension Scheme by giving an additional deduction benefit in respect of contributions made by individual assessees (both salaried and self-employed) up to the limit of Rs. 50,000. Below are the tax benefits available under Section 80CCD (1B).

• This was the new section introduced after the amendments of 2015 Union Budget.
• This section provides an additional tax benefit of up to Rs. 50,000 for the contributions made towards New Pension Scheme.
• Both salaried and non-salaried individuals can avail this benefit under the Section.
• The allowed deduction is over and above the limit of Section 80CCD (1)

This is a more beneficial clause for individual who fall under the higher tax bracket. Individuals who falls under 30% tax bracket can save up to Rs. 15,000 and the ones who fall under 20% tax bracket can save around Rs. 10,000 by investing in the National Pension Scheme (NPS).

If an individual has savings or investments of Rs. 1,50,000 under Section 80C (excluding his contribution to National Pension Scheme), then he can show his contribution to the national pension scheme (NPS) under Section 80 CCD (1B) up to maximum of Rs.50,000, which is over the 1.5 lakh limit allowed under Section 80C.