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Ever since Budget 2015 introduced an additional deduction of Rs 50,000 for investment only in the National Pension System, there has been some confusion about how to claim this deduction. This deduction is to be claimed from gross total income before calculation of tax payable

The Finance Act 2015 inserted a new sub-section (1B) under Section 80CCD of the Income Tax Act to encourage investment in NPS by any individual by allowing an additional deduction of INR 50,000 over and above the INR 1.5 lakhs available under Section 80CCE of the Act. However, the way this sub-section is drafted, there seems to be ambiguity as to under which scenario the additional INR 50,000 is eligible for deduction and experts appear divided on this.

The existing Section 80CCE allows individuals to deduct up to INR 1.5 lakh from their gross total income (before calculating tax payable) if this INR 1.5 lakh is invested in specified avenues. Certain specified expenditures also qualify for deduction under this INR 1.5 lakh limit of section 80CCE. The additional deduction of INR 50,000 allowed for investment in NPS is over and above this limit of INR 1.5 lakh.

Section 80CCD(1) of the Act, which governs contributions made by an individual taxpayer states that an assessee being an individual who has during the financial year paid or deposited any amount in his account under a pension scheme notified by the government is allowed to claim deduction from his income limited to 10% of his salary (for salaried individuals) or 10% of gross total income (for self-employed individuals). It is evident from the reading of the Section that contributions made under this Section shall be eligible for deduction under Section 80CCE only if made either directly or through the employer i.e. as deduction from salary.

Section 80CCD(1B) of the Act reads as follows - "an assessee referred to in sub-section (1), shall be allowed a deduction from his total income which shall not exceed fifty thousand rupees". Going by the literal reading, sub-section (1B) takes us back to sub-section (1) for the definition of the individual taxpayer (assessee) who is eligible to claim the additional deduction of INR 50,000 i.e. individual taxpayer is required to make the contribution to the NPS account either directly or through salary deducted by his employer. Moreover, contribution made by the employer in employees' NPS account is governed by sub-section 2 of Section 80CCD of the Act. This is indicative of the intent of the government that additional deduction of INR 50,000 would not be available to the individual taxpayer if the amount has been contributed by the employer. Where the individual taxpayer has exhausted the limit of INR 1.5 lakhs under Section 80CCE of the Act by making other investments eligible for deduction under the said section (apart from NPS), contribution made by him (either by himself or through deduction from salary) towards NPS can be utilised to claim additional deduction of INR 50,000 under Section 80CCD(1B) of the Act.

**It is assumed that contribution to NPS by the employer/ employee does not exceed 10% of the employees' salary