The government of India has made multiple provisions in the Income Tax Act that enable deductions against investments in different avenues. Such deductions help individuals save a larger portion of their income. One of such key provisions is deductions under Section 80CCD of the Income Tax Act.
Read along to learn more about tax deductions under the 80CCD of the Income Tax Act.
Section 80CCD in a Nutshell
Section 80CCD of the Income Tax Act relates to all the deductions extended to individuals against their contribution towards the National Pension Scheme, aka NPS, or the Atal Pension Yojana, aka APY. The employer’s contribution toward NPS also falls under this ITA section.
Deductions Under Section 80CCD (1) and Section 80CCD (2)
Section 80CCD of the Income Tax Act has been divided into 2 subsections – one deal with tax deduction rules concerning self-employed and salaried individuals, and the other concerns employers’ NPS contributions.
Section 80CCD (1)
80CCD lists the rules concerning the deductions extended to individuals for their NPS contributions. All employees, whether government employees, self-employed individuals, or private employees, come under this purview.
Notably, the provisions apply to contributing Indian citizens between 18 and 60. However, it also applies to non-resident Indians or NRIs.
The major provisions of Section 80CCD (1) include:
- The maximum permissible deduction for employees is 10% of the salary
- The maximum permissible deduction for self-employed individuals is 20% of their total gross income.
The maximum deduction limit under Section 80 CCD (1) of the Income Tax Act is capped at Rs. 1.5 lakh in a fiscal year.
A new subsection, i.e., (1B), has been added to Section 80CCD. Under this provision, individuals can claim an additional maximum deduction of Rs. 50,000. This feature is available to both self-employed and salaried individuals.
In other words, a deduction of Rs. 2 lakh is available under Section 80CCD under Income Tax Act. Meanwhile, tax benefits under Section 80 CCD (1B) of ITA can be claimed over the tax deductions under Section 80 CCD (1).
Section 80CCD (2)
The provision under this section of ITA is available only if an employer contributes to the National Pension Scheme of their employee.
Note that an employer can contribute towards the National Pension scheme in addition to that toward the Public Provident Fund and Employee Provident Fund. The employer’s contribution can be higher or equal to the employee’s contribution.
Section 80CCD (2) of the Income Tax Act applies only to salaried individuals, and the tax deductions under it can be availed over those extended under Section 80CCD (1).
Under Section 80CCD (2), salaried individuals can claim the following deductions:
- A deduction of up to 14% of their salary contributed by the state or central government toward the National Pension Scheme
- Deduction of up to 10% of their salary contributed by other employers towards the National Pension Scheme.
National Pension Scheme under Section 80CCD
National Pension Scheme is a government-backed initiative that extends the perks of organized pension schemes. Originally it was meant for only government employees but was later made accessible to the private sector and self-employed entities. NPS is designed to help individuals build a corpus for retirement, and it offers a fixed monthly income to subscribers once they retire. This aims to help retired individuals to lead a comfortable and financially independent life.
Key features of NPS:
- Individuals must contribute towards the scheme until they are 60.
- NPS is mandatory for government employees but voluntary for individuals from other sectors.
- To be deemed eligible for income tax deduction under the provisions of a tier-I account, subscribers must contribute at least Rs. 6000 yearly or Rs. 500 monthly.
- To be deemed eligible for deductions under the tier-II account, subscribers must contribute at least Rs. 2000 yearly or Rs. 250 monthly.
- Subscribers can choose from investment instruments such as government bonds, securities, equity funds, and more.
- Partial withdrawals of a maximum of 25% of the contributions are permissible but are subject to conditions.
- Individuals can withdraw a maximum of 60% of their NPS corpus as a lump sum, but they must invest the remaining 40% in an annuity scheme.
- NPS is among the cheapest equity-linked market investment instruments.
Atal Pension Yojana under Section 80CCD
Atal Pension Yojana Or Pradhan Mantri Pension Yojana is a government-backed scheme that guarantees individuals pension payouts after retirement. The scheme is available for 18-40 years and requires at least a 20-year period before the payouts begin at 60. Premature payments are allowed in some cases, and investors can choose a pension amount ranging from Rs. 1000-5000 monthly on retirement.
Other key features of APY include:
- Deductions of a maximum of Rs. 1.5 lakhs are allowed under Section 80CCD (1) of ITA
- An additional investment of a maximum of Rs. 50, 000 is allowed for deductions under Section 80CCD (1B)
- In case of the death of the investor, the payouts are paid to their spouse
- In case the investor does before 60, their spouse can withdraw the fund or continue the scheme
- Self-employed entities can claim a tax deduction of a maximum of Rs. 1.5 lakhs for investments in the scheme, that’s up to 20% of their annual income
Terms for tax deductions under Section 80CCD
Here are the terms to claim tax deductions under Section 80 CCD:
- Tax deductions under Section 80CCD are available to self-employed and salaried individuals
- A maximum of Rs. 2 lakhs is allowed as deductions under Section 80CCD, and it is inclusive of the additional tax deduction of Rs. 50,000 under 80CCD (1B)
- Deductions under Section 80CCD cannot be claimed by the investor again under Section 80C. Hence, the total deduction under 80C – combined deduction under 80C and 80CCD can’t be more than Rs. 2 lakhs.
- The corpus received from National Pension Scheme as a monthly or surrendered amount is taxable.
- Corpus received from NPS and reinvested in annuity plans is exempted from tax.
- Tax deductions under 80CCD can be claimed at the end of the fiscal year while filing taxes as per their income tax slab.
Keep these in mind to ensure you make the most of your retirement corpus and build a sturdy retirement fund for a secure and financially independent future.