Section 80CCD of the Income Tax Act, 1961, refers to the tax deductions provided to taxpayers on contributions made to Central Government-backed pension schemes. This includes the National Pension System (NPS) and Atal Pension Yojana (APY). As per this section, employers can also make contributions to NPS on the employee’s behalf. 

1. Section 80CCD (1)

Section 80CCD (1) deals with offering tax deductions to all taxpayers or assessees contributing to NPS. Both salaried employees, including those hired by the government or any other employer, and self-employed individuals are eligible for the deduction under this clause. 

 

The tax advantages provided under Section 80CCD (1) are listed below:

• Maximum deduction of up to ₹1.5 Lakhs available, inclusive of the Section 80C limit 

• Maximum deduction for salaried individuals is 10% of their annual salary (basic + dearness allowance)

2. Section 80CCD (2)

Under the corporate model of NPS, an employer may also make contributions to the pension funds of its employees. This allowable deduction goes above what is permitted under Section 80C. This deduction is not applicable to self-employed people. 

 

Here are a few features of Section 80CCD (2): 

• Employers can make NPS contributions on the employee’s behalf for tax benefits 

• Employer's contribution can be greater or less than that of the employee

• The only party that may contribute on behalf of an employee is the employer

 

By classifying a portion of the donation as a business expense in the profit and loss account, the employer can claim a tax break. Employees can claim a deduction for such contributions u/s 80CCD (2) if their employer makes a contribution to the new pension scheme on their behalf.

3. Section 80CCD (1B)

To encourage people to contribute more towards NPS, a new subsection was introduced to offer an additional deduction. This is applicable to contributions of up to ₹50,000 made by individual taxpayers (both salaried and self-employed). 

 

Individuals in higher tax brackets will profit more from this provision in the following ways: 

• Citizens in the 30% tax band could save up to ₹15,000 by making NPS contributions

• Citizens in the 20% bracket could save roughly ₹10,000

 

If a person has savings or investments totaling ₹1.5 Lakhs under Section 80C, they may demonstrate a contribution to NPS under Section 80 CCD (1B). This amount can go up to  ₹50,000, which is more than the ₹1.5 Lakh limit allowed by Section 80C. However, this excludes their contribution to the National Pension Scheme.

If you wish to claim deductions under Section 80CCD, you must meet the following eligibility criteria parameters: 

• Indian citizens and NRIs who make contributions to NPS or APY 

• Individuals over 18 years of age 

• Self-employed and salaried individuals in the public or private sector 

Here are some considerations to bear in mind while claiming deductions u/s 80CCD:

• NPS and APY contributions are eligible for Section 80CCD deductions

• Maximum deduction permitted under Sections 80C, 80CCC, 80CCD(1), and 80CCD(1B) is ₹2 Lakhs

• Self-contributions made to NPS or APY allow for an additional deduction of ₹50,000 

• It is not possible to claim the same deductions under sections 80CCD(1B) or 80C after already claiming them u/s 80CCD(1)

• Income tax is applicable to pension payments received post-retirement from NPS 

• The sum spent to buy annuities and the corpus at maturity, however, will be entirely tax-free

• Withdrawals from NPS are taxed because they fall under the Exempt-Exempt-Taxed (EET) rule of the tax code

• 40% of the maturity amount received from NPS is exempt from income tax

• Income tax is not levied on the amount invested in an annuity plan. 

• Monthly pensions from the annuity will be taxed according to the recipient's tax bracket

To understand the difference between the new and old regimes in the context of Section 80CCD, let us look at an example.

 

If you earned a basic salary of ₹15 Lakhs in the previous year 2021-22. Your contribution to NPS deducted from this salary at 10% is ₹1.50 Lakhs. Additionally, the employer’s contribution towards NPS at 12% of salary is ₹1.80 Lakhs. You deposited ₹1 Lakh in his PPF A/c.

However, as per Section 80CCE, an overall deduction u/s 80CCC, 80C, and 80CCD(1) is restricted to a maximum of ₹1.50 Lakhs.

The list of investments that can be deducted from taxes under Section 80CCD of the Income Tax Act is as follows. In your IT returns, you can include these deductions.

• Section 80CCD allows for tax deductions for all contributions that are made by individuals to the National Pension Scheme and Atal Pension Yojana.

• All contributions made to the National Pension Scheme by employers on behalf of their employees.

The benefits of this section and its sub-sections are mentioned below:

Tax deductions are available for contributions made to NPS under Section 80CCD. This investment vehicle is open for self-employed and salaried individuals in the private and public sectors. 

 

Until retirement or the age of 60 for superannuation, investments in NPS are restricted. However, people can continue to invest up to the age of 70.

 

Important NPS facts include the following:

• Participation in the NPS is optional for everyone except Central Government employees

• NPS is an attractive option for those looking for tax benefits  

• There are two main accounts that NPS payments can be paid to: Tier I and II

• Employees working in the private sector may only deduct NPS contributions made to Tier I accounts

• Employees working in the public sector are able to deduct Tier I & Tier II payments from their NPS taxes

• At maturity, NPS corpus up to 60% may be withdrawn tax-free, and acquisition of annuities must be made with the remaining 40%

Also known as Pradhan Mantri Pension Yojana (PMP), this is a government-sponsored retirement scheme that offers individuals a guaranteed minimum annuity after retirement

 

The unorganized industry is the target market for this pension initiative. Individuals aged between 18 and 40 years can apply for this pension scheme. Similar to NPS, contributions to the APY are only allowed up to the age of 60, with premature withdrawals permitted under certain conditions.  

 

Listed below are certain tax advantages associated with APY: 

• Up to ₹50,000 in APY as a second investment qualifies for a deduction u/s 80CCD (1B)

• Depending on the number of payments made, subscribers may receive a monthly pension of ₹1,000, ₹2,000, ₹3,000, ₹4,000, or ₹5,000

• Deceased subscriber’s spouse is entitled to receive the pension in their stead 

• Spouses of deceased subscribers, who passed away before 60 years, can either claim the entire corpus or continue to receive the pension

At the end of the year, when you file your ITR, you can claim deductions under Section 80CCD. When the fiscal year ends, you can submit your ITR and collect the deductions permitted under Section 80CCD. 

 

To claim the deductions, you must present the necessary documentation. The supplemental paperwork will include investment receipts or evidence that you are making contributions to the National Pension Scheme.

While planning your taxes, keep in mind that the limit under Section 80CCD in part (1) is to be considered alongside sections 80C and 80CCC. The three sections offer a combined tax relief of ₹1.5 Lakhs. 

 

Let’s say, you have invested ₹1 Lakh u/s 80C and ₹2 Lakhs u/s 80CCD for deductions under part (1). In that case, the tax deduction out of the two investments will be ₹1.5 Lakhs, and not ₹3 Lakhs.