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

What is Section 80 CCD (1B)?

When it comes to deductions, some of the most popular deductions are included in Chapter VI A of the Income Tax Act.
Section 80CCD(1) of the Income Tax Act, 1961, which allows an individual employed in the public or private sector or self-employed person to claim a deduction for the amount contributed towards their National Pension System (NPS) account.
Under this section, an individual can claim a deduction of up to 10% of their salary (or) gross total income, for contributions made towards their NPS account. The maximum deduction under this section is Rs 1.5 lakh, which is inclusive of the deduction claimed under Section 80C.

Additionally, Section 80 CCD (1B) was introduced, which allows a further deduction of INR 50,000, over and above the deduction available under Section 80C for INR 1.5 for contributions made by individual taxpayers towards the NPS.

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 which is available for both the Government and private sector and 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 with regular income in the form of annuities.

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. There are some restrictions on the withdrawal of funds from Tier I accounts. Contributions made towards this account are tax deductible and qualify for deductions u/s- 80CCD(1B).

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 investment amount for Tier II Account is INR 250 at any one time. There is no requirement for a minimum investment in a year. A minimum deposit of INR 1000 would be required to open the account. The contribution made to a Tier 2 account is not eligible for a tax deduction. Also, the Accumulated balance can be withdrawn without any restriction.

What is the eligibility criteria for investing under Section 80 CCD(1B)?

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

How to invest in NPS to avail of the tax benefits?

NPS investment can be made through a financial institution that acts as a Point of Presence (POP). Almost all banks and non-banking financial companies are authorized to act as POP. POPs have specialized 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 must submit the filled-in registration form, identity proof, age proof, and address proof.

What is the lock-in period of the NPS 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 you receive would be taxed at your income tax slab rates.

What tax deduction is available 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 to allow 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 benefits for investing in the NPS scheme. If the employer contributes up to 10% of the basic salary (including Dearness Allowance) towards an 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 deduction 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 benefits 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).

What are the documents required for claiming tax benefits under NPS?

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 the contribution is done to the 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)'.

What is the withdrawal criteria under the 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 Accounts, 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 to 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 a lump sum, and the remaining 80% is used for paying annuities. 20% of the lump sum withdrawal 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 made 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.

Define the relationship between Section 80CCD and Section 80CCC?

Section 80CCD allows tax benefits on the investments made under the National Pension Scheme, a saving scheme for retirement. Section 80CCC, on the other hand, allows a 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 includes the deduction available under Section 80C. However, both sections have the similarity that they allow deductions on investments done for retirement planning.

List down the 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 are not eligible for 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 a regular income for the rest of your life. A win-win solution, don’t you think?