Section 80CCD - Deduction under Section 80CCD

The government offers a slew of tax-saving deductions and exemptions, through various sections of the Income Tax Act. These deductions and exemptions can reduce your tax burden by a considerable amount, especially if you are a salaried individual. One of the most popular sections, Section 80C, is known to provide a substantial amount of deductions to taxpayers. There are several sub-sections under Section 80C, one of them being 80CCD.

What is Section 80CCD?

Amounts contributed by an individual taxpayer to government-sponsored schemes such as National Pension Scheme(NPS) or Atal Pension Yojana(APY) qualifies for a 80CCD deduction. Employee’s contributions to the schemes can also be eligible for deductions under Section 80CCD of the Income Tax Act.

What is the National Pension Scheme?

The National Pension Scheme is a central government-backed pension scheme open to those working in, both, the public and private sectors, as well as self-employed individuals. Some of the features include:

  • Mandatory subscription for those employed by the central government, with the option for voluntary subscription for others.
  • Regular contributions to be made till the individual reaches 60 years of age
  • A minimum annual contribution of ₹6000 a year or ₹500 a month needs to be made to qualify for 80CCD deduction under Tier 1 of NPS, while, under Tier 2, you need to contribute only contribute ₹2000 a year or ₹250 a month to be eligible for tax benefits
  • NPS is a market-linked investment toll that allows subscribers to choose from allocating their money in government securities, fixed income instruments and equity funds. A maximum of 75% is allowed to be allocated in equities.
  • Partial withdrawal of 25% is allowed in certain conditions
  • At the time of maturity, one can withdraw 60% of the amount as lump sum, while the remaining 40% needs to compulsorily be invested into buying an annuity plan

Deduction under Section 80CCD - Terms & Conditions

  • There are two sub-sections under Section 80CCD: Section 80CCD(1) and Section 80CCD(2). Section 80CCD(1) is further subdivided into Section 80CCD(1) and Section 80CCD(1b). The deduction limits for 80CCD(1) and 80CCD(1b) do not overlap.

  • Sections 80C and 80CCD have a common deduction limit. The combined tax savings of an individual under 80C and 80CCD cannot exceed ₹2 lakhs.

  • While reinvesting the maturity proceeds from NPS is exempted from tax, pension received on a monthly basis or amount received on surrendering the scheme is added to the total income and taxed accordingly

Classification of Section 80CCD

It is clearly divided into two subsections as under:

1. 80CCD(1):

  • This section applies to employees’ contributions. 10% of the salary for salaried and 20% for self-employed individuals is allowed to be deducted from taxation.

  • Indian citizens including NRIs between 18 to 60 years of age who are self-employed or employed with central government or private companies who subscribe to NPS fall in this category.

  • The maximum tax benefit that can be claimed under this section is ₹2,00,000 with effect from FY 2016-17. While a maximum amount of ₹1.5 lakh is allowed as per 80CCD(1), an additional tax benefit of ₹50,000 is available as per 80CCD(1b), thereby raising the total limit to ₹2 lakhs.

2. 80CCD(2):

  • If your employer is contributing to your NPS, you qualify for income tax deduction for upto 10% of your salary( basic + dearness allowance) or an amount equal to the employer’s contribution.

  • Only salaried individuals can avail tax benefits under this subsection. Self-employed individuals do not qualify under this sub-section.

  • Deductions under this subsection can be claimed over above the deductions available under Section 80CCD(1).

Eligibility for Claiming Deductions under 80CCD

  • Salaried or self-employed individuals who are Indian citizens or NRIs can claim 80CCD income tax benefits
  • Hindu Undivided families do not qualify for any deduction under this section.
  • A salaried employee contributing 10% of his salary and a self-employed individual directing 20% of his or her total income towards NPS in a year qualify for an exemption of 10%and 20% respectively.

Claiming 80CCD Tax Deductions

Salaried and employed individuals can claim 80CCD income tax benefit in the respective ITR form when they file their annual tax returns. However, it must be specified whether the contributions made to the NPS are from the taxpayer themself or by the employer on behalf of the taxpayer. While filing your returns, you would also be required to submit transaction statements as evidence in order to claim applicable deductions.

Conclusion

Investing in Section 80CCD can help one prepare for a fulfilling retirement as well as save on tax. To maximise your tax benefits, you can also invest in tax-saving instruments like health insurance. You can consider opting for Bajaj Allianz Health Insurance on Finserv MARKETS and benefit from a whole host of perks, in addition to tax-savings. The health insurance plan on Finserv MARKETS provides you with benefits like swift claim settlements, sums assured of up to Rs. 50 lakhs, cashless facilities in more than 6000+ hospitals across India, and coverage for pre and post hospitalisation expenses. Invest in tax-savings instruments like NPS and health before the March 31st deadline to maximise your take-home income!

FAQs

  • ✔️What is the least amount that I can invest and still claim 80CCD income tax deduction?

    Depending on whether you opt for Tier 1 or Tier , you can contribute either a minimum of ₹2000 or ₹6000 respectively in a year, in order to claim an exemption.
  • ✔️What should be the mode of NPS premium payment?

    Both cash and cheques are acceptable modes of making a contribution to your NPS account
  • ✔️Do I need proof of payment in order to avail this tax benefit?

    Yes, it is advisable to keep the receipt while paying cash and a copy of the cheque used to make payment towards NPS.
  • ✔️What if Section 80CCD is insufficient to reduce my tax outgo?

    The Income Tax Act is full of various deductions and exemptions that can help you minimise your tax outgo. If you have exhausted the combined Section 80CCD and 80C deduction, you can invest in instruments that help you avail of tax-benefits under various other sections of the ITA. For instance, under Section 80D of the ITA, you can take advantage of Section 80D by investing in health insurance. You can avail of deductions of up to Rs. 25,000 (if you are under 60 years of age), by purchasing a health insurance plan for yourself, your spouse, or your dependent children.

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