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Section 80CCD - Deductions Under Section 80CCD of Income Tax

Updated on: 16 Jan, 2024 05:49 PM

Paying income tax is mandatory if you have earned income above the basic exemption limits in a financial year. The tax rate depends on your income level (a.k.a. income tax slab). Moreover, to reduce the burden of taxation, the Income Tax Act has also specified various tax-saving avenues. These tax-saving investments help in lowering your tax liability. Chapter VIA of the Income Tax Act contains a list of deductions under Section 80C and others that help you cut down on your tax. Some deductions allow tax-free expenses, while others deal with tax-saving investment avenues. Tax-saving investment avenues are the best way to lower taxes while, at the same time, creating savings.

What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961 provides deductions for contributions to the National Pension System (NPS) or Atal Pension Yojana (APY).

The National Pension Scheme and Atal Pension Yojana are retirement-oriented investment schemes launched by the Government of India. Both schemes provide pension income after the specified time period.

If you choose to invest in the avenue under Section 80CCD, you can claim a total deduction of INR 2 lakhs in a financial year. Section 80CCD is further divided into two subsections: Section 80CCD(1) and Section 80CCD(2). Section 80CCD (1) has a subsection called 80CCD(1B).Let us know more.

Deductions available under Section 80CCD(1)

Section 80CCD(1) of the Income Tax Act, 1961 provides deductions for contributions made towards the National Pension Scheme and Atal Pension Yojana scheme. Here are the key points to understand about Section 80CCD(1):

  1. Eligibility: Any individual, whether employed or self-employed, can claim deductions under Section 80CCD(1) for contributions made towards their NPS account or any other eligible pension scheme.
  2. Deduction Limit: The deduction limit under Section 80CCD(1) is as follows:
    • For employees: The maximum deduction allowed is 10% of the individual's salary (basic salary plus dearness allowance). This limit applies to employees contributing to their NPS account through their salary.
    • For self-employed individuals: The maximum deduction allowed is 20% of the individual's gross total income (before considering deductions under Section 80C, 80CCC, and 80CCD(1)). This limit applies to self-employed individuals contributing to their NPS account.
  3. Overall Deduction Limit: The deduction claimed under Section 80CCD(1) is part of the overall limit of Rs. 1.5 lakh under Section 80CCE, which includes deductions under Sections 80C, 80CCC, and 80CCD(1) combined.
  4. Tax Treatment on Withdrawal: When the individual withdraws or receives the maturity amount from the NPS account or eligible pension scheme, it is taxable in the year of receipt. However, a certain portion of the withdrawal amount may be tax-exempt, subject to the prevailing tax rules and conditions.
  5. Reporting: The contributions made towards the NPS account or eligible pension scheme need to be reported while filing the Income Tax Return (ITR) under the relevant sections and schedules.

In the Union Budget of 2015, an amendment was made to Section 80CCD(1) of the Income Tax Act, introducing a new subsection, Section 80CCD(1B). Here are the key details about Section 80CCD(1B):

  1. Additional Deduction: Section 80CCD(1B) allows individuals, whether employees or self-employed, to claim an additional deduction of up to ₹50,000 over and above the limit mentioned under Section 80CCD(1).
  2. Eligible Contributions: The additional deduction of ₹50,000 can be claimed for contributions to the National Pension System (NPS) or the Atal Pension Yojana (APY).
  3. Non-Duplication of Claims: While claiming deductions under Section 80CCD(1B), it is important to ensure no claims are duplicated. This means that the contribution amounts claimed under Section 80CCD(1) should not be claimed again under Section 80CCD(1B).
  4. Overall Deduction Limit: Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
  5. Reporting: The contributions made towards NPS or APY, along with the deductions claimed under Section 80CCD(1B), need to be reported while filing the Income Tax Return (ITR) under the relevant sections and schedules.

Deduction under Section 80CCD (2)

This Section applies to salaried employees whose employer also contributes to the National Pension Scheme. The employer can contribute towards the National Pension Scheme besides contributions to PPF and EPF. The limit of deduction allowed would be lower of the contributions made by the employer or 14% of the salary (in case the employer is Central Govt or State Govt.)/10% of the Salary (in case of other employers). This deduction is available over and above the deduction under Section 80 CCD (1).

Sections Description Deduction Limit
80CCD(1) Employee contributions to NPS/Atal Pension Yojana up to 10% of salary + dearness allowance Up to ₹1,50,000
80CCD(2) Employer contributions to NPS/Atal Pension Yojana Up to 10% of basic + dearness allowance
80CCD(1B) Self contributions to NPS and Atal Pension Yojana above the Section 80CCD(1) limit Up to ₹ 50,000

National Pension Scheme under Section 80CCD

Here are some of the features of the National Pension Scheme –

  • When the National Pension Scheme was launched, it was designed as a saving scheme only for Government employees. However, the scheme was then offered to the public also. As of today, any individual can invest in the National Pension Scheme
  • Investments done in the National Pension Scheme help investors create a retirement corpus. The created corpus can then be used to avail of annuity pay-outs when the individual retires
  • Contributions to the National Pension Scheme can be made till the individual attains 60 years of age
  • Contributions to the scheme are mandatory for specified employees of the Central Government. However, for the general public, the contribution is voluntary
  • There are two types of accounts under the National Pension Scheme. One is the Tier I account which is mandatory, and the other is the Tier II account which can be opened if the individual has a Tier I Account.
  • To become eligible to claim an income tax deduction on the contributions to the National Pension Scheme, the investor should initially contribute a minimum of INR 500 at the time of registration for Tier I and INR 1000 for Tier II. Subsequently, the minimum amount should be INR 500 per contribution and INR 1000 in one financial year towards the Tier I Account
  • Contributions criteria towards the Tier II Account, the minimum amount should be INR 250 per contribution.
  • National Pension Scheme allows investors to invest their money in different funds like Equity Funds, Government Funds, or Government Securities.
  • Since equity investments are allowed, investors can grow their retirement corpus in trend with economic growth.
  • Though investments in the National Pension Scheme are for a long period, partial withdrawals are allowed, subject to certain terms and conditions. Investors can withdraw up to 25% of their investments if they fulfill the prescribed conditions of the scheme.
  • When the scheme closes, or the assessee opts out of the scheme, investors can avail of up to 60% of the accumulated corpus in a lump sum. The remaining 40% of the corpus should be availed as annuity income or pension by investment in an annuity plan.

Atal Pension Yojana (APY) under 80CCD

Here are the salient features of the Atal Pension Yojana for you to know –

  • This is also a retirement-oriented investment scheme that seeks to provide a regular income to investors after they retire.
  • The scheme can choose a fixed monthly pension amount of INR 1000 to INR 5000 when the investor attains 60. The amount of pension would depend on the investor’s age on joining the APY and the amount of investment done by him/her.
  • Joint life annuities can also be availed under the scheme wherein the annuitant's spouse would receive the annuity payouts on the annuitant's death. Moreover, the contributed amount is paid back to the nominee on the spouse's death.
  • Individuals aged between 18 and 40 years can join the Atal Pension Yojana scheme as it requires a minimum period of 20 years before payments start at 60 years.
  • If the investor dies before attaining 60 years of age, the spouse can choose to exit the scheme and avail of the accumulated corpus or continue with the scheme till the stipulated tenure

Benefits of Section 80 CCD

Here are the key benefits of Section 80CCD:

  • Deduction for Employee Contribution (Section 80CCD(1)): Under this provision, an individual who is an employee can claim a deduction on their own contribution towards the NPS. The deduction is limited to a maximum of 10% of the individual's salary (or 20% for self-employed individuals) or the actual amount contributed, whichever is lower. This deduction is within the overall limit of Section 80C (up to Rs. 1.5 lakh).
  • Deduction for Employer Contribution (Section 80CCD(2)): This deduction is available to salaried individuals for the contribution made by their employer towards the NPS. The deduction is allowed for up to 10% of the individual's salary (basic salary + dearness allowance) and there is no upper limit on the deduction amount.
  • Additional Deduction for Self-Employed (Section 80CCD(1B)): Individuals, including self-employed individuals, can claim an additional deduction of up to Rs. 50,000 under Section 80CCD(1B) over and above the deductions available under Section 80CCD(1) and Section 80C. This allows for an increased tax benefit for those contributing towards the NPS.

It's important to note that the overall deduction under Section 80CCD (1) and Section 80CCD (1B) cannot exceed 10% of the individual's gross total income.

Claim the deductions available under Section 80CCD(2) now and secure your future with the National Pension Scheme or Atal Pension Yojana. Don't miss out on these tax-saving benefits. E-file your income tax returns now and avoid last-minute stress, or
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Frequently Asked Questions

Q- Can I surrender the National Pension Scheme account?

Yes, you can surrender your NPS account, provided some conditions are fulfilled.

Q- Are the benefits of the National Pension Scheme and the Atal Pension Yojana tax-free?

No, the benefits are not tax-free. Both these schemes allow pension income to be taxable in the annuitant's hands as income from salary.

Q- What if I buy an annuity plan using NPS corpus? Would that be taxable?

The accumulated corpus of the National Pension Scheme can be reinvested in any pension plan. Such a reinvestment would not attract any tax. Only the pension payments which would be later paid would be taxable.

Q- What is the maximum deduction which I can claim?

The maximum deduction that an assessee can claim depends on investments and expenditures made by an assessee subject to fulfillment of conditions as applicable. However, an assessee can claim up to INR 2 lakhs after availing of the benefits under sections 80C and 80CCD(1B) of the Income Tax Act, 1961.

Q- What documents would be required to claim a tax deduction?

Proof of joining the scheme and making the contributions would be required to avail of deductions under Section 80CCD.

Q- Is it possible for me to claim tax exemption on the insurance policy I have taken for my two-wheeler?

No, an assessee can not claim tax exemption for the same.

Q- If I pay health insurance for my father & mother-in-law (senior citizen), can I get the tax benefits, or if the tax benefits are only applicable to parents?

Only the assessee’s parents are considered for the tax benefits.

Q- Can I show the insurance premium paid for my dependent under 80c for tax-saving purposes?

Yes. An assessee can claim a deduction u/s 80C with respect to insurance premiums, but it does not include the premium paid by the Parents of the assessee.

Q- Father made an insurance policy on the life of his married son and nominated his daughter-in-law. Who can take an income tax benefit from it?

Yes. Only an individual making the payment can claim a deduction from the LIC policy (i.e., the father ).

Q- Do ULIP plans offer tax benefits?

Yes, an individual can claim tax benefits under Section 80C.

Q- Can I take two LIC policies and get a tax benefit for both? What is the tax benefit limit under a LIC policy?

Yes, an assessee can take multiple LIC policies for the purpose of deduction u/s 80C. The maximum amount of deduction available under section 80C is INR 1.50 lakhs.

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 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.