Regular post-retirement income | Additional tax benefit on investments up to ₹50,000 u/s 80CCD (1B) - EEE Category | Regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India)

What is Section 80CCD?

Section 80CCD of the Income Tax Act, 1961 refers to the income tax deductions that are allowed to taxpayers on the contribution that they make towards specific central government pension schemes, that is, New Pension Scheme (NPS). The organisation’s contribution on the employee’s behalf towards NPS is also included in this section as per the IT Act’s rules. 

Subsections Under Section 80CCD

1. Section 80CCD (1)

The Income Tax Act of 1961, Section 80CCD (1), deals with offering tax deductions to all taxpayers or assessees contributing to the national pension system (NPS). Both salaried employees (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 by Section 80CCD (1) are listed below:

 

  • The most that can be deducted from taxes is Rs.1.5 lakhs. This limit includes the Section 80C limit.

  • The maximum deduction for salaried individuals is 10% of their annual wage (basic plus dearness allowance).

  • The maximum deduction allowed for those who are not salaried cannot be more than 10% of their gross annual income. 

2. Section 80CCD (2)

Under the corporate model of the National Pension Scheme, an employer may also make contributions to the pension funds of its employees. 

 

There are three possible ways to structure contributions.

 

  • Equal to the employee's contribution, the employer may also make a contribution.

  • Additionally, the employer's contribution may be greater or less than that of the employee.

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

Both the business and the employee may gain from these contributions in terms of taxes. By classifying his portion of the donation as a business expense in the profit and loss account, the employer can claim a tax break. If an employee's employer makes a contribution to the pension plan on their behalf, they are eligible for a tax deduction.

 

Employees may claim a tax deduction for such contributions u/s 80CCD (2) of the Income Tax Act, 1961, if their employer makes a contribution to the new pension scheme on their behalf.

 

The minimum of the following three conditions applies to the maximum deduction amount.

 

  • Employer contributions to the pension plan

  • 10% of the annual salary of the individual (base plus dearness allowance)

  • Total gross income

This allowable deduction goes above what is allowed by Section 80C. This deduction is not applicable to self-employed people. It only applies to people who receive a salary.

3. Section 80CCD (1B)

To encourage people to pay more to the National Pension Scheme, a new subsection was included that offers an additional deduction benefit for contributions made by individual taxpayers (both salaried and self-employed), up to a maximum of Rs. 50,000. Below is a list of the tax incentives offered under Section 80CCD(1B).

 

  • This was the newly introduced section as a result of the 2015 Union Budget amendments.

  • This provision allows for an additional tax benefit of up to Rs. 50,000 to be applied to the payments made to the New Pension Scheme.

  • Both salaried and non-salaried individuals are eligible to use this benefit under the Section.

  • The Section 80CCD(1) cap is exceeded by the allowed deduction.

Individuals in higher tax brackets will profit more from this provision. Individuals in the 30% tax band can save up to Rs. 15,000 by making contributions to the National Pension Scheme, and those in the 20% tax bracket can save roughly Rs. 10,000 by doing the same.

 

If a person has savings or investments totaling Rs. 1.5 lakhs under Section 80C, they may demonstrate a contribution to the national pension scheme (NPS) under Section 80 CCD (1B) up to a maximum of Rs. 50,000, which is more than the 1.5 lakh limit allowed by Section 80C. (excluding their contribution to the National Pension Scheme).

Eligibility to Claim Tax Deductions under Section 80CCD

  • All Indian citizens who make contributions to NPS or APY are subject to the provisions of Section 80CCD. This deduction is available to NRIs as well.

  • The age requirement for Section 80CCD deductions is 18 years of age or older.

  • In addition, only self-employed people and salaried people, whether in the public or private sector, are qualified to claim tax deductions under Section 80CCD.  Hindu Undivided Families are ineligible.

  • As a salaried or self-employed person, you may claim up to Rs.1.5 lakhs jointly when filing for income tax returns under Section 80CCD(1) for payments paid to NPS or APY on an individual basis and Section 80CCD(2) for contributions made by the employer. For self-contributions towards NPS or APY under Section 80CCD, an extra Rs.50,000 may be claimed (1B).

Terms and Conditions to Avail Tax Benefit under Section 80CCD

Here are some considerations to bear in mind while claiming deductions  Section 80CCD:

 

  • Self-employed individuals, employees of the public sector, and employees of the private sector are all eligible for Section 80CCD deductions.

  • Both NPS and Atal Pension Yojana contributions are eligible for Section 80CCD deductions.

  • The maximum deduction permitted under Sections 80C, 80CCC, 80CCD(1), and 80CCD(1B) is $2,000,000.

  • For self-contributions made to NPS or APY, Section 80 CCD(1B) allows for an additional deduction of 50,000.

  • It is not possible to claim the same deductions under Section 80CCD(1B) or Section 80C after having already claimed them under Section 80CCD(1).

  • Income tax will apply to the pension payments from NPS/APY investments that are received after retirement. The sum spent to buy annuities and the corpus at maturity, however, will be entirely tax-free.

  • When submitting income tax returns, deductions allowed by Section 80CCD may be claimed. You might be asked to provide evidence for the same, though.

Tax Implications on Withdrawal of National Pension Scheme (NPS) and Monthly Pensions

  • Withdrawals from the National Pension Scheme are taxed because they fall under the Exempt-Exempt-Taxed (EET) rule of the tax code. However, 40% of the maturity revenues are exempt from income tax.

  • Income tax is not levied on the amount invested in an annuity plan. The monthly pensions from the annuity, however, will be taxed according to the recipient's tax bracket.

Section 80CCD Deduction in New and Current Tax Regime

To understand the difference between the new and current regime, let us look at an example.

 

If you earn a basic salary of Rs. 15,00,000 in P.Y. 2021-22. Your contribution to NPS deducted from this salary @ 10% of salary was Rs. 1,50,000. Further the employer’s contribution towards NPS @ 12% of salary is Rs. 1,80,000. You deposited Rs. 1,00,000/- in his PPF A/c. 

Particulars

Current Regime

New Regime

Basic salary

Rs.15,00,000

Rs.15,00,000

Less: Standard Deduction u/s 16

Rs.50,000

-

Add: Employer’s Contribution to NPS

Rs.1,80,000

Rs.1,80,000

Gross Total Income

Rs.16,30,000

Rs.16,80,000

Deduction u/s 80CCD(1) (1,50,000 – 90,000)

Rs.60,000

-

Deduction u/s 80CCD(1B)

Rs.50,000

-

Deduction u/s 80CCD(2)

Rs.1,50,000

Rs.1,50,000

Total Income

Rs.13,70,000

Rs.15,30,000

Tax on Total Income

Rs.2,32,440

Rs.251,160

  • Deduction for an employee's own contribution to the National Pension Scheme is allowed as deduction under section  80CCD(1) to a maximum of 10% of the salary. 

  • As per Sec 80CCE, an overall deduction under section 80CCC, 80C and 80CCD(1) is restricted to a maximum of Rs.1,50,000.

Investments That Come Under Section 80CCD

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.

Benefits of Section CCD 80CCC, 80C and  80CCD

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

Section

Particulars

Maximum Deduction Value 

80 CCD (1)

Contributions of employees to NPS or APY up to 10% of their salary + dearness allowance (DA)

NIL

80 CCD (1B)

Self-contributions to NPS or APY Section 80 CCD (1) limit

Up to Rs.50,000

80 CCD (2)

Contributions of employer to NPS or APY

Up to 10% of the basic pay + Dearness allowance

National Pension System under 80CCD

Tax deductions are available for payments paid to the National Pension System (NPS) under Section 80CCD of the tax code. In 2004, the first NPS retirement tool was released to the market. Prior to 2009, it was only meant for government employees. Since then, anyone can use it.

 

Those who are self-employed or working in the private/public sectors and are over the age of 18 may invest in NPS at this time. NPS is a market-linked vehicle that has four different classes represented in its management by fund managers. Until retirement or the age of 60 for superannuation, investments in NPS are restricted. Up to the age of 70, people can continue to keep investing.

 

Important NPS facts includes the following:

 

  • Participation in the NPS is optional for everyone else but central government employees.

  • Many people want to invest in NPSs due to their favourable tax status.

  • National Pension System donations are allowed for deductions of tax up to Rs. 2 lakhs under Section 80CCD.

  • 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. The acquisition of annuities must be made with the remaining 40%. 

Atal Pension Yojana under 80CCD

This is a government-sponsored retirement scheme that offers individuals a guaranteed minimum annuity after retirement is the Atal Annuity Yojana (APY), commonly known as the Pradhan Mantri Pension Yojana(PMP).

 

The unorganised industry is the target market for this pension initiative. Individuals who are in the ages of 18 to 40 may apply to this pension scheme. It is similar to the NPS, contributions to the APY are only allowed up to the age of 60, with premature  withdrawals that are allowed under certain conditions.

 

The Atal Pension Yojana's tax advantages are comparable to those of the NPS:

 

  • Up to Rs. 50,000 in Atal Pension Yojana as a second investment is comparable to NPS in that it qualifies for a deduction u/s 80CCD (1B).

  • Depending on the amount of payments made, subscribers will get a monthly pension that is guaranteed in retirement in the amount of Rs. 1,000, Rs. 2,000, Rs. 3,000, Rs. 4,000, or Rs. 5,000. Taxes are still levied on this pension income.

  • The spouse of a subscriber who passes away will be entitled to receive the pension in their stead. If a subscriber dies before reaching the age of 60, their spouse has two choices: either they can terminate the plan by taking the entire corpus, or they can continue it to collect the pension.

How to File a Section 80CCD Deduction Claim

At the end of the year, when you file your income tax returns, you can claim deductions under Section 80CCD. When the fiscal year closes, you can submit your income tax returns and collect the deductions allowed by 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.

FAQs

  • ✔️What does Section 80CCD cover?

    Tax deductions are allowed under Income Tax Act of 1961 Section 80CCD for contributions made by both individuals and businesses to government pension plans like the NPS and APY.

  • ✔️How do I make a Section 80CCD deduction claim?

    You can claim Section 80CCD deductions when you submit your yearly income tax returns. When you record your tax deductions, you might be required to show proof of your APY or NPS contributions.

  • ✔️How much of a deduction is allowed by Section 80CCD?

    Section 80CCD allows for a maximum deduction of Rs.20,000,000. Included in this sum is the additional Rs.50,000 deduction allowed by Section 80CCD (1B).

  • ✔️How much may you deduct under Section 80CCD?

    The Section 80CCD deduction cap is as follows:

    The maximum deduction allowed by Section 80CCD is Rs.2 lakhs. This sum includes the extra Rs 50,000 deduction permitted by Section 80CCD, subsection 1B.

    Employers are restricted from deducting more than 10% of an employee's salary for any other organisation and 14% of a government employee's income.