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Section 80CCD(1B) Deduction: National Pension Scheme (NPS) Tax Benefits

Updated on: 01 Aug, 2022 12:15 AM

The Income Tax Act has prescribed various forms of deductions which help in the reduction of your tax liability. There are various prescribed investments and expenses which you pay from your income which are allowed as a deductible investment or expense. As these investments and expenses are deducted from your income your taxable income decreases. As the taxable income decreases, you get to pay a lower amount of tax.

What is Section 80 CCD (1B)?

When it comes to deductions, some of the most popular deductions are contained in Chapter VI A of the Income Tax Act. This Chapter contains Section 80 deductions. Section 80C is a very popular section which allows deductions of up to INR 1.5 lakhs on different types of investments and expenses. There is another section, Section 80 CCD (1B) which allows a further deduction of INR 50,000, over and above the deduction available under Section 80C for INR 1.5 lakhs. The deduction under Section 80 CCD (1B) is allowed if you invest towards the National Pension Scheme (NPS) offered by the Government of India.
Do you know what NPS investment is all about? Let’s understand it in brief -

What is NPS scheme?

National Pension Scheme is an investment scheme offered by the Government which helps in retirement planning. You can invest in the scheme when you are working and then the scheme would create a corpus for your retirement. The corpus can then be availed to provide you regular incomes in the form of annuities.

Eligibility to invest in the NPS scheme

Resident individuals as well as NRIs can invest in the National Pension Scheme. The age of the investor should be between 18 and 60 years. In case of NRIs, however, if the NRI’s citizenship changes after the NRI has invested into the scheme, the scheme would be terminated.

Investing in NPS

NPS investment can be done through a financial institution which acts as a Point of Presence (POP). Almost all banks and non-banking financial companies are authorised to act as a POP. POPs have specialised branches which collect NPS deposits from investors. These branches are called Point of Presence Service Providers or POP- SP. The list of POP-SPs can be found online at the official website of the scheme which is https://www.npscra.nsdl.co.in/pop-sp.php To invest in the scheme you would have to submit the filled in registration form, identity proof, age proof and address proof.

Type of NPS accounts

When you invest in the National Pension Scheme, there would be two accounts to choose from. These accounts are as follows –

  • Tier I account

    Tier I Account is the compulsory account into which you would have to invest if you are investing in the National Pension Scheme. The minimum investment required in this account is INR 500 at one time and INR 1000 in a year.

  • Tier II Account

    Tier II Account is the voluntary account into which you can invest after you have invested in the Tier I Account. The minimum amount of investment for Tier II Account is INR 250 at any one time. There is no requirement of a minimum investment in a year. To open the account, a minimum deposit of INR 1000 would be required.

Withdrawal from NPS scheme

The NPS scheme matures when you attain 60 years of age. Withdrawals from the National Pension Scheme before this age would be subject to certain terms and conditions. These terms and conditions apply to investments done in Tier I Account. In Tier II Account, withdrawals are allowed without any restrictions.

Withdrawals can be of two types – full withdrawal or partial withdrawal. Let’s understand the terms and conditions attached with both these types of withdrawals –

  • Full withdrawal

    You can close the NPS investment before attaining 60 years of age. When you do so, 20% of the accumulated corpus can be availed in lump sum and the remaining 80% is used for paying annuities. 20% of the lump sum withdrawn is allowed as a tax-free income. The annuity payments are, however, taxable in your hands.

  • Partial withdrawals

    Partial withdrawals are allowed after two completed years of investing in the NPS scheme. Up to 25% of the accumulated funds can be withdrawn. Withdrawals are allowed only for meeting specified expenses like marriage expenses, medical emergencies, financing a home, etc. Up to three partial withdrawals can be done during the investment period of the scheme and between each withdrawal there should be a gap of 5 years. The amount of partial withdrawal is allowed as a tax-free benefit.

Maturity of the scheme

When you attain 60 years of age, the scheme matures. On maturity, 60% of the accumulated corpus can be taken in a lump sum. Annuity payments would then be made from the remaining 40% of the corpus. The lump sum benefit would be tax-free in your hands and the annuity payments that you receive would be taxed at your income tax slab rates.

Tax deduction under Sections 80C, 80CCD and 80CCD (1B)

  • Section 80C

    As a tax paying individual, you can claim a deduction of up to INR 1.5 lakhs by investing in Section 80C avenues like PPF, ELSS, EPF, life insurance, five year fixed deposits, etc.

  • Section 80CCD

    Section 80CCD is meant for allowing deductions on NPS investments. NPS investments of up to INR 1.5 lakhs are allowed as a deduction from your taxable income under Section 80 CCD. However, this deduction would also include deductions available under Section 80C. This means that if you have already invested INR 1 lakh in Section 80C investments, you can claim an additional deduction of INR 50,000 through NPS investments under Section 80CCD.

  • Section 80CCD (1B)

    To boost the popularity of the National Pension Scheme, the Government has introduced a sub-section under Section 80 CCD. This sub-section, (1B), allows an additional deduction of INR 50,000 for investment into the National Pension Scheme. So, if you have deposited INR 1.5 lakhs in Section 80C investments you can still invest up to INR 50,000 in NPS and claim an additional deduction under Section 80 CCD (1B). Thus, the total deduction available would be up to INR 2 lakhs.

  • Section 80CCD (2) - Tax benefits under the corporate sector

    Investors in the corporate sector can claim additional tax benefit for investing in the NPS scheme. If the employer contributes up to 10% of the basic salary (including Dearness Allowance) towards a NPS scheme for the employee, the contribution done by the employer would be allowed as a tax-free benefit under Section 80 CCD (2). There would be no limit on the exemption available as long as the contribution is limited to 10% of the salary.

  • Section 80CCD (2) - Tax benefits under the Government Undertaking

    Taxpayers employed in government undertakings (Central Government only upto 1.4.2020 and both central government & state government from 1.4.2020 , as amended by Union Budget 2022) can claim additional tax benefit for investing in the NPS scheme. If the employer i.e., the government contributes up to 14% of the basic salary (including Dearness Allowance) towards a NPS scheme for the employee, the contribution done by the employer would be allowed as a tax-free benefit under Section 80 CCD (2).

Documents required for claiming tax benefit

To claim the above-mentioned tax benefits, the following documents would be required to be submitted –

  • Transaction statement which is the proof of investment
  • The receipt of contribution done to Tier I account which is available online on your NPS account. The receipt can be downloaded under ‘View’ by clicking ‘Statement of Voluntary Contribution under National Pension System (NPS)'.

Relationship between Section 80CCD and Section 80CCC

Section 80CCD allows tax benefits on the investments made under the National Pension Scheme which is a saving scheme for retirement. Section 80CCC, on the other hand, allows tax deduction on the contribution made to specified pension funds. However, while Section 80CCD allows an additional deduction of up to INR 50,000 towards NPS, the deduction under Section 80CCC is limited to INR 1.5 lakhs which is including the deduction available under Section 80C. However, both the sections have the similarity that they allow deductions on investments done for retirement planning.

Important points to consider for Section 80CCD (1B)

Here are some important things about claiming a deduction under Section 80CCD (1B) which you should know –

  • Contributions made to Tier I Account would only qualify for deduction under Section 80CCD (1B). Investments in Tier II account would not earn any deductions.
  • Both salaried and self-employed individuals can claim deduction under Section 80CCD (1B)
  • The relevant documents pertaining to the investment should be furnished for claiming the deduction

So, by investing in the National Pension Scheme, you can claim an additional tax deduction under Section 80 CCD (1B). Moreover, you can also create a retirement corpus which would give you regular incomes for the rest of your life. A win-win solution, don’t you think?

Frequently Asked Questions

Q- Is it necessary to avail annuity payments under the National Pension Scheme?

The whole concept of the National Pension Scheme is to provide you with regular incomes after retirement and so availing annuity payments is compulsory.

Q- Does Section 80CCD (1B) apply also to withdrawals?

No, Section 80 CCD (1B) applies only to investments made towards NPS.

Q- Who manages the National Pension Scheme?

The Pension Fund Regulatory and Development Authority (PFRDA) manages the National Pension Scheme.

Q- Who cannot claim the benefit of Section 80CCD (1B) deductions?

Persons of Indian Origin (PIO), Hindu Undivided Families (HUFs) and Overseas Citizens of India (OCIs) cannot claim the tax deductions available under Section 80CCD (1B).

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.



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