Section 80CCD(2) Under Income Tax Act: Tax Benefits on Employer’s NPS Contribution (Over & Above ₹1.5 Lakh)

While Sections 80C, 80CCC, and Section 80CCD(1) provide tax benefits for an individual’s own contributions to various schemes including NPS, Section 80CCD(2) deals specifically with the tax treatment of the employer’s contribution to an employee’s National Pension System (NPS) account. This section offers a significant advantage as the deduction available here is over and above the commonly known ₹ 1.5 lakh limit.  

Understanding Section 80CCD(2) is particularly beneficial for employees whose employers contribute to their NPS accounts, as it directly impacts their taxable salary and overall tax liability for Assessment Year 2025-26 (relevant to income earned in Financial Year 2024-25).

What is Section 80CCD(2)? (Employer’s NPS Contribution Deduction)

Section 80CCD(2) provides a deduction from an employee’s Gross Total Income (GTI) for the contribution made by their employer to the employee’s National Pension System (NPS) Tier-I account.  

• Gross Total Income (GTI): The total income computed by summing up income under all five heads (Salaries, Income from House Property, PGBP, Capital Gains, Income from Other Sources), after allowing for set-off of eligible losses.
• Deduction: An amount subtracted from GTI to arrive at Total Taxable Income.  
• National Pension System (NPS): A government-regulated, long-term retirement savings and investment product.  

The employer’s contribution to the employee’s NPS Tier-I account is first included as part of the employee’s salary income (it’s treated either as a perquisite or a salary component). Then, a corresponding deduction is allowed to the employee for this contribution under Section 80CCD(2). This creates a tax-efficient structure where the employer’s contribution, while initially considered income, is largely neutralised by the deduction.

Who Can Claim Section 80CCD(2) Deduction?

The deduction under Section 80CCD(2) can only be claimed by Individuals who are employees.

• Individual: A natural person.
• Employee: Someone working under an employer. This includes employees of the Central Government, State Government, or any other employer (like private sector companies).  
• Assessee: A person (in this case, an employee individual) by whom tax is payable.

Self-employed individuals cannot claim this deduction as they do not have an employer making contributions on their behalf. HUFs, companies, firms, or LLPs are also not eligible.

The Eligible Contribution Under Section 80CCD(2)

The eligible contribution for deduction under this section is the amount contributed by the employer to the NPS Tier-I account of the employee.

• NPS Tier-I Account: The primary retirement savings account under NPS. This deduction is only for contributions to Tier-I, not Tier-II (the voluntary account).
• Employer’s Contribution: The amount deposited by the employer into the employee’s NPS account, typically as part of the employee’s CTC (Cost To Company) structure.
• Previous Year (PY): The financial year (April 1st to March 31st) in which the employer’s contribution is made.

The Specific Limit Under 80CCD(2) (Percentage of Salary)

Section 80CCD(2) allows a deduction up to a certain percentage of the employee’s salary:  

• For Central Government Employees: The maximum deduction is limited to the lower of the actual amount contributed by the employer or 14% of their ‘Salary’.
• For State Government Employees: The maximum deduction is limited to the lower of the actual amount contributed by the employer or 14% of their ‘Salary’.  
• For Employees of Any Other Employer (e.g., Private Sector): The maximum deduction is limited to the lower of the actual amount contributed by the employer or 10% of their ‘Salary’.

‘Salary’ for the purpose of Section 80CCD(2) means:

• Basic Salary + Dearness Allowance (DA), if DA is paid as per the terms of employment for retirement benefits.  
• It excludes all other allowances, perquisites, and other non-cash benefits.

How 80CCD(2) Works – Over and Above 80CCE

This is the most significant feature of Section 80CCD(2). The deduction available here is completely separate from and over and above the aggregate limit of ₹ 1,50,000 specified in Section 80CCE.  

• Section 80CCE combines the deductions claimed under Section 80C + Section 80CCC + Section 80CCD(1), capping the total at ₹ 1,50,000 for the year (PY 2024-25, AY 2025-26).
• The deduction under Section 80CCD(2) is allowed in addition to any deduction claimed under the Section 80CCE umbrella and the additional deduction under Section 80CCD(1B).

Explanation:

An employee contributing to NPS through their employer can potentially claim deductions under multiple layers:

1. Up to ₹ 1,50,000 under Section 80CCE (combining their own investments/contributions under 80C, 80CCC, and their own NPS contribution under 80CCD(1)).
2. An additional deduction of up to ₹ 50,000 for their own NPS Tier-I contribution under Section 80CCD(1B).
3. A separate deduction for the employer’s NPS contribution under Section 80CCD(2), up to the prescribed percentage limit (10% or 14% of Salary).  

This means an employee can potentially achieve total deductions significantly exceeding ₹ 2,00,000 through their salary and NPS contributions.

Taxability of NPS Withdrawal (Brief Recap)

The tax treatment of withdrawals from the NPS Tier-I account remains the same, regardless of whether the contribution was made by the employee (claiming deduction under 80CCD(1) or 80CCD(1B)) or the employer (deduction under 80CCD(2)):

• At Retirement (Age 60 or Superannuation): Up to 60% of the accumulated corpus can be withdrawn as a tax-exempt lump sum. The remaining minimum 40% must be used to purchase an annuity plan, and the periodic pension from this annuity is fully taxable.
• Partial Withdrawal: Up to 25% of your own contributions can be withdrawn under specific conditions and are fully exempt.  
• Withdrawal Before Retirement: Generally leads to taxability and mandatory annuitization of a larger portion.

How to Claim Section 80CCD(2) Deduction

Claiming the deduction under Section 80CCD(2) is relatively straightforward for employees:

1. The employer will include their NPS contribution as part of the employee’s gross salary income in the salary slip and Form 16 (Part B).
2. The employer will then show the corresponding deduction under Section 80CCD(2) in Form 16.
3. When filing your annual Income Tax Return (ITR), this deduction will typically be auto-populated based on the information provided in Form 16, or you need to manually enter it based on your salary details.

Proof required is primarily your salary slip showing the employer’s contribution and Form 16.

Important Points to Remember about Section 80CCD(2)

• Eligible Assessee: Only Individuals who are Employees.
• Eligible Contribution: Employer’s contribution to employee’s NPS Tier-I account.
• Limit under 80CCD(2): 10% of Salary (Basic+DA) for private/other employees, 14% for Central/State Govt. employees, or actual employer contribution, whichever is less.  
• Over and Above 80CCE: This deduction is in addition to the ₹ 1,50,000 limit (80C+80CCC+80CCD(1)) and the ₹ 50,000 limit (80CCD(1B)).  
• Tax Treatment: Contribution is first added to Gross Salary and then fully or partially deducted under this section.
• Withdrawal Taxability: Specific rules apply to withdrawals from NPS (as mentioned above).
• Proof Required: Salary Slip, Form 16.
• Tax Regimes (AY 2025-26 onwards): This is a critical distinction. Deduction under Section 80CCD(2) is one of the few deductions that is AVAILABLE even if you choose to file your tax return under the default/New Tax Regime (Section 115BAC). It is also available if you opt for the Old Tax Regime.  

Examples

Example 1: Private Sector Employee

Mr. Anand is a private sector employee with a Basic Salary + DA of ₹ 10,00,000 p.a. His employer contributes 10% of his salary to his NPS Tier-I account. He makes no other investments under 80C, 80CCC, 80CCD(1) or 80CCD(1B).

• Employer’s Contribution: 10% of ₹ 10,00,000 = ₹ 1,00,000.
• This ₹ 1,00,000 is added to his Gross Salary.
• Limit under 80CCD(2): Lower of Contribution (₹ 1,00,000) or 10% of Salary (₹ 1,00,000) = ₹ 1,00,000.
• Mr. Anand’s Deduction under Section 80CCD(2) = ₹ 1,00,000.
• This ₹ 1,00,000 deduction is over and above any deduction he might claim under 80CCE or 80CCD(1B). He can claim this deduction even if he chooses the New Tax Regime.

Example 2: Central Government Employee

Ms. Kavita is a Central Government employee with a Basic Salary + DA of ₹ 12,00,000 p.a. Her employer contributes 14% of her salary to her NPS Tier-I account. She also makes a personal contribution of ₹ 50,000 to NPS Tier-I.

• Employer’s Contribution: 14% of ₹ 12,00,000 = ₹ 1,68,000.
• This ₹ 1,68,000 is added to her Gross Salary.
• Limit under 80CCD(2): Lower of Contribution (₹ 1,68,000) or 14% of Salary (₹ 1,68,000) = ₹ 1,68,000.
• Ms. Kavita’s Deduction under Section 80CCD(2) = ₹ 1,68,000. (This is over and above 80CCE/80CCD(1B)).
• Her personal NPS contribution of ₹ 50,000 is eligible for deduction under Section 80CCD(1B), up to ₹ 50,000, which is also over and above the 80CCE limit.  
• If she also has 80C/80CCC investments totaling, say, ₹ 1,50,000, her total deduction under 80CCE would be ₹ 1,50,000.
• Total Deduction for Ms. Kavita: ₹ 1,50,000 (80CCE) + ₹ 50,000 (80CCD(1B)) + ₹ 1,68,000 (80CCD(2)) = ₹ 3,68,000. (Assuming she opts for the Old Tax Regime or claims only 80CCD(2) in the New Regime). If she chooses the New Regime, her deduction would be ₹ 1,68,000 under 80CCD(2).

Conclusion

Section 80CCD(2) is a highly beneficial provision for employees participating in the NPS. By allowing a deduction for the employer’s contribution (up to 10% or 14% of salary) that is over and above the aggregate ₹ 1.5 lakh limit of Section 80CCE and the additional ₹ 50,000 limit of Section 80CCD(1B), it provides a significant tax advantage. Furthermore, its availability even under the default New Tax Regime (Section 115BAC) from AY 2025-26 makes it a universally applicable tax-saving tool for employees.

For employees whose employers offer NPS contributions, leveraging this deduction is a straightforward way to reduce taxable income. For accurate computation and to understand its full impact alongside other deductions and tax regimes, consulting a qualified tax professional is always recommended.