In a important progress aimed at enhancing retirement savings, the Union Budget 2024-25 introduces important amendments to Section 80CCD of the Income Tax Act, 1961. These changes are set to provide substantial benefits for employees and employers under the new tax regime. Here’s a detailed overview of the proposed changes and their consequences.
Understanding Section 80CCD and Section 36
**1. Section 80CCD Overview:
- Purpose: Section 80CCD provides deductions for contributions made towards pension schemes approved by the government, including the National Pension System (NPS).
- Current Provisions:
- Contribution by Central/State Governments: Deduction up to 14% of the employee’s salary is allowed.
- Contribution by Other Employers: Deduction up to 10% of the employee’s salary is allowed under the old tax regime.
**2. Section 36 Overview:
- Purpose: Section 36 pertains to deductions allowed while computing the income under the head ‘Profits and gains of business or profession’.
- Current Provisions:
- Employer Contribution: Deductions for contributions made by the employer to a pension scheme on behalf of an employee are capped at 10% of the employee’s salary.
Proposed Amendments:
**1. Increase in Employer Contribution Deduction (Section 36):
- Current Limit: As per Clause (iva) of sub-section (1) of Section 36, the deduction allowed to an employer for contributions towards a pension scheme is limited to 10% of the employee’s salary.
- Proposed Change: The new proposal aims to increase this deduction limit from 10% to 14% of the employee’s salary. This change will take effect from April 1, 2025.
- Impact: This amendment will provide greater tax relief to employers and encourage them to contribute more towards their employees’ pension schemes.
**2. Revision of Deduction for Contributions by Other Employers (Section 80CCD):
- Current Limit: Under sub-section (2) of Section 80CCD, contributions by employers other than the Central or State Government are eligible for a deduction of up to 10% of the employee’s salary under the old tax regime.
- Proposed Change: The amendment proposes increasing this deduction limit to 14% for employees whose total income is chargeable to tax under sub-section (1A) of Section 115BAC (the new tax regime). This change will also be effective from April 1, 2025(ay 2025-26)
- Impact: This change aligns the deduction limits for contributions made by other employers with those made by Central or State Governments, but only for individuals opting for the new tax regime.
Implications of the Amendments
**1. For Employees under the New Tax Regime:
- Enhanced Retirement Savings: Employees in the new tax regime will benefit from increased deductions On employers’ contributions, thereby incentivizing higher contributions towards their pension schemes. This aligns with the broader objective of encouraging more substantial retirement savings.
- Tax Benefits: Higher deductions will reduce taxable income, leading to potential tax savings, particularly beneficial for those under the new tax regime.
- Please note that in the New Regime No deduction is available on Employees’ Deduction
Read More : New Regime is now More attractive
**2. For Employees under the Old Tax Regime:
- Current Limits Remain: For employees opting for the old tax regime, the deduction limit for employers’ contributions will remain at 10% of their salary. This ensures that while the new regime offers enhanced benefits, the old regime retains its existing provisions.
**3. For Employers:
- Increased Deduction Limit: Employers will be able to claim a higher deduction for contributions made to pension schemes, which can improve the overall compensation package offered to employees.
- Encouraging Contributions: The increased limit under the new tax regime could encourage employers to make more significant contributions to employee pension schemes, supporting long-term employee financial security.
Conclusion
The proposed amendments to Section 80CCD and Section 36 represent a strategic enhancement in retirement savings and pension contributions in India. By increasing the deduction limits for employer contributions and aligning benefits with the new tax regime, the government is supporting individual financial security and reinforcing the robustness of the pension system. As these changes take effect from April 1, 2025, both employees and employers will benefit from a more favorable tax environment, promoting greater contributions to retirement savings and ultimately supporting long-term economic stability.