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Section 80CCD: Deduction for APY & NPS Contribution

Updated on: 23 Mar, 2023 02:39 PM

Paying income tax on your income 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 you 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.

When it comes to tax-saving investment avenues, Section 80C tops the charts. It is a favorite among every investor as it allows a range of investment options and expenses to be eligible for deduction from your taxable income. Some of the popular options for claiming deduction under Section 80C include the following –

  • Payment made towards a Life Insurance Policy
  • Investments into Equity Linked Savings Schemes
  • Investment into 5-year tax saver Fixed Deposit Schemes
  • Principal repayment of a Home Loan availed
  • Tuition Fees paid for the child’s education (up to a maximum of 2 children)
  • Investment in Employees’ Provident Fund
  • Investment in Public Provident Fund
  • The Investment in National Savings Certificates, etc.

The maximum deduction which can be claimed under Section 80C, combining all the eligible options, is INR 1.5 lakhs. What if you want to save additional tax?

If you are looking for additional tax savings, Section 80CCD of the Income Tax Act comes into the picture. This section lets you reduce up to INR 50,000 of your taxable income over and above the tax-free limit that you get under Section 80C. Thus, if you choose to invest in the avenue under Section 80CCD, you can claim a total deduction of INR 2 lakhs, INR 1.5 lakhs through Section 80C, and INR 50,000 through Section 80CCD. Let’s understand how –

Deductions available under Section 80CCD

Section 80CCD allows deductions from your gross total income if you invest in the National Pension Scheme or the Atal Pension Yojana scheme. Whether you or your employer makes the investment, a deduction on the investment can be claimed under this section.

What are National Pension Scheme and Atal Pension Yojana?

Both 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.

Salient features of the National Pension Scheme

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 done till the individual attains 65 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. 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 the 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.

Salient features of the Atal Pension Yojana

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 pension amount of INR 1000 to INR 5000 per month when the investor attains 60 years of age. 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 spouse of the annuitant would receive the annuity payouts on the death of the annuitant. Moreover, on the death of the spouse, the contributed amount is paid back to the nominee
  • Individuals aged between 18 years and 40 years can join the Atal Pension Yojana scheme as it requires a minimum period of 20 years before payments start at the age of 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

How do you claim deductions under Section 80CCD?

Now that you know which deductions are eligible for Section 80CCD and the features of these deductions, let’s understand how to claim such deductions. Let’s understand 2 sub-sections under Section 80CCD i.e., 80CCD(1) and 80CCD(2),these sub-sections in details –

Section 80 CCD (1)

This sub-section applies to both self-employed and salaried individuals to claim deductions on the contributions made towards the New Pension Scheme or the Atal Pension Yojana. In the case of an employee, the employee can be a Government employee or a private-sector employee. If the taxpayer is between the ages of 18 years and 65 years, contributions made towards both schemes would be allowed as a deduction under Section 80CCD (1). If the taxpayer is a salaried employee, the maximum deduction allowed under this section would be limited to 10% of the salary, which means basic salary and dearness allowance. In the case of self-employed individuals, the maximum available deduction is 20% of the gross total income of the financial year the taxpayer earns. However, section 80CCE states that the total amount of deduction under sections 80C, 80CCC, and 80CCD(1) cannot exceed INR 1.5 lakhs. Moreover, an additional deduction of INR 50,000, over and above INR 1.5 lakhs, can be claimed under Section 80CCD (1B). Thus, the total deduction available under Section 80CCD (1B), including Section 80C, would be INR 2 lakhs in a financial year.

Section 80 CCD (2)

This Section is applicable to salaried employees whose employer is also contributing 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 CG or SG)/10% of the Salary (in case of other employers). This deduction is available over and above the deduction under Section 80 CCD (1).

So, understand the deduction available under Section 80CCD so that you can lower your tax liability further and create a retirement corpus in the process.

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.