Deductions Under Section 80CCD of Income Tax

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).

The contributions made by employers are also included under this section. Also, deduction under section 80CCD is not available under the new regime and is only available to those who choose the old regime.

Deductions 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):

• 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.
• 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.
• 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.
• 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.
• 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):

• 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).
• 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).
• 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).
• 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.
• 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. Section 80CCD(2) is not applicable to self-employed individuals. The employer can contribute towards the National Pension Scheme besides contributions to PPF and EPF. The amount of contribution made by the employer should be either equal to or higher than the employee’s contribution. 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).

Note: The deduction limit under section 80CCD(2) for all the employees (both government and private employees) has been increased to 14% from the previous 10%. This increased limit will be applicable for the ITR filing of FY 2025-26.

Section 80CCD Deductions under the New Tax Regime

Compute your tax liability under both regimes with the Tax2win Income tax calculator here.

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 savings scheme only for Government employees. However, the scheme was then offered to the public. 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 payouts 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
• The minimum contribution amount towards a Tier II NPS account 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 line 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

80CCD(1), 80CCD(1B), and 80CCD(2) - A Comparison

The table given below shows a comparative analysis of the sections 80CCD, 80CCD(1) and section 80CCD(2) -

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Benefits of Section 80CCD

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 your deduction while filing ITR i.e., up to ₹ 1,50,000 jointly under Section 80CCD(1) for contributions made to NPS or APY individually and Section 80CCD(2) for contributions made by the employer. An additional ₹ 50,000 can be claimed for self-contributions made to NPS or APY under Section 80CCD(1B). Consult with a tax expert.

Terms and Conditions for Deductions under Section 80CCD of Income Tax Act

1. Eligibility: Deductions under Section 80CCD can be claimed by both salaried and self-employed individuals. Participation in the scheme is mandatory for government employees, while it is voluntary for other individuals.
2. Maximum Deduction: The maximum deduction under Section 80CCD (2) is Rs 2 lakhs. This includes an additional deduction of Rs 50,000 available under Section 80CCD (1B).
3. Tax Benefits: Tax benefits claimed under Section 80CCD cannot be claimed again under Section 80C of the Income Tax Act. The combined deduction under Sections 80C and 80CCD is capped at Rs 2 lakhs.
4. Taxation on Withdrawals: Amounts received from the National Pension Scheme (NPS) as monthly pension payments or upon surrender will be subject to tax according to applicable tax provisions.
5. Reinvestment in Annuity Plan: If an amount received from the NPS is reinvested in an annuity plan, it is completely exempt from tax.
6. Claiming Deductions: Deductions under Section 80CCD can be claimed at the end of the financial year when filing tax returns.

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Learn More About Section 80CCD: https://www.youtube.com/watch?v=BhxWzd_Yn7c