Deductions Under Section 80CCD(1B) of Income Tax

Have you maxed out your tax saving options under Section 80C and still looking for ways to reduce your tax burden? Let us explore Section 80CCD(1B) which offers an additional deduction of up to Rs. 50,000 for contributions made to the National Pension System (NPS).

What is Section 80CCD(1B)?

Section 80CCD(1B) provides an additional deduction of up to Rs 50,000 for contributions made to NPS. The additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available over and above the benefit of Rs 1.50 lakh deduction under Section 80CCD(1). Thus, the maximum deduction limit is Rs. 2 lakhs under Section 80CCD(1) + Section 80CCD(1B) (Deductions would be available to an individual only if he exercises the option of shifting out of the new tax regime u/s 115BAC(1A)).

DID YOU KNOW?

Maximum deductions under section 80C + 80CCC + 80CCD(1) = Rs. 1.5 lakh 
Rs. 50,000 deduction under Section 80CCD(1B) is independent of the deductions made in the above sections. This means you can claim a total deduction of Rs. 2 lakh by combining:

• Section 80C + 80CCC + 80CCD(1): Up to Rs. 1.5 lakh
• Section 80CCD(1B): Up to Rs. 50,000

Click here to know more about 80C, 80CCC & 80CCD(1)

Example

• Say you invest Rs. 1.5 lakh under Section 80C (PPF, Tax Saver FD, etc.).
• You also contribute Rs. 70,000 annually towards NPS.
• You can claim a total deduction of Rs. 2 

About NPS

NPS, or National Pension System, is a government-sponsored pension scheme available to both salaried and self-employed individuals. It offers dual benefit:

• Tax savings during your working years
• A regular income stream after retirement 

NPS is one of the most popular options for individuals seeking to create a retirement corpus and a regular monthly income. The money deposited in NPS is invested in various securities and investment avenues, including the equity market. It is widely regarded as one of the cheapest investment options with equity exposure. As the returns are directly related to the market performance, there is no guarantee of any particular amount. Still, over a period of time, returns from NPS have been among the highest in the market.

Two Types of NPS Accounts

There are two types of accounts in NPS, NPS Tier 1 and NPS Tier 2.

• Tier 1 Account (Pension Account):This has a fixed lock-in period until the subscriber reaches the age of 60 years. Only partial withdrawal is allowed, with certain conditions. Contributions made towards Tier 1 are tax deductible and qualify for deductions under Section 80CCD(1) and Section 80CCD(1B). This means you can invest up to Rs. 2 lakhs in an NPS Tier 1 account and claim a deduction for the full amount, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000/- under Section 80CCD(1B).
• Tier 2 Account (Additional Account): This is a voluntary savings account that allows subscribers to make withdrawals as and when they like. Only the contributions made by a Central government employee to a Tier 2 account are eligible for tax deduction. To open a Tier 2 account, you must open a Tier 1 account first. The deposits made in the NPS Tier II accounts are eligible for an income tax deduction, under Section 80C of the Income Tax Act, for government employees. On the other hand, there is no income tax deduction offered on NPS Tier II deposits for private-sector employees and the gains in the NPS Tier 2 are taxable at the respective slab rates.

Eligibility under Section 80CCD(1B)

An individual taxpayer is eligible to claim deduction under Section 80CCD(1B) by filing the income tax return under the old tax regime. 

However, there is an age restriction for opening an NPS account. The following individuals can open NPS:

• Resident individuals between 18-70 years  
• Non-Resident Indians (NRIs) aged between 18-70 years. However, if NRI’s citizenship changes after investing in NPS, the scheme will be terminated. 

How to Invest in NPS to Avail Tax Benefits?

Individuals can invest in NPS online or offline. NPS account can be opened online through the NSDL e-Gov portal, now known as protean. It can also be opened offline through a financial institution acting as a Point of Presence (POP). Most banks and non-banking financial companies are authorised to act as POPs. 

Things to Note while Claiming Deductions Under Section 80CCD(1B)

Here are some of the critical points about Section 80CCD(1B) that you should be aware of:

• Individuals must file their taxes under the old tax regime, i.e., opting out of the applicability of sec 115BAC(1A).
• The additional deduction of Rs. 50,000/- is available only for contributions made to NPS Tier 1 accounts
• Tier 2 accounts are not eligible to claim the deduction under Section 80CCD(1B)
• The deductions under Section 80CCD(1B) are available to salaried individuals as well as to self-employed individuals
• You need to produce documentary evidence of the transaction related to the contribution to NPS
• Partial withdrawals are allowed under NPS but are subject to specific terms and conditions
• The total exemption limit under Section 80CCD(1B) is Rs. 50,000/- and is independent of exemptions under Section 80C. Thereby, you can claim a maximum deduction of  Rs. 2 lakhs
• In case the assessee dies and the nominee decides to close the NPS account, then the amount received by the nominee is exempt from taxation

Documents Required to Claim Tax Benefit Under NPS

The following documents are required to be submitted while investing in NPS:

• Bank account statement
• PAN card
• Aadhaar card

Taxation on NPS Withdrawal

If partial withdrawals are made from the account, then only 25% of the contribution made is exempt from taxation. If the assessee is an employee and decides to close the NPS account or opt out of NPS, then only 40% of the total amount is tax-exempt. The assessee can withdraw 60% of the entire amount upon reaching the age of 60 as tax-free income. The remaining 40% is also tax-free if it is used to purchase an annuity plan. 

Section 80CCD(1B) offers you an excellent opportunity to save a substantial amount on your taxation liabilities. This way, you can not only reduce your present tax liabilities but also work towards creating a substantial corpus for your retirement. Remember the points mentioned above, taking any action related to your NPS account regarding Section 80CCD(1B).

Benefits for existing NPS subscribers under Section 80CCD

• Existing NPS subscribers can benefit from the deduction under Section 80CCD for their NPS contribution.
• Section 80CCD(1) gives a tax deduction on NPS contributions up to 10% of their salary (basic salary + DA) made by employees. However, the total amount of deduction of 80C and 80CCD(1) cannot exceed Rs.1.50 lakhs in the previous year.
• Section 80CCD(1B) gives an additional deduction of Rs.50,000 on their NPS contributions.
• Section 80CCD(2) provides that employees can claim a deduction on the NPS contribution of up to 10% of salary (14% of salary for Central Government) made by the employer. 
• They can split their NPS contribution and claim partly in 80C and remaining in 80CCD(1B), making the most of Rs.2 lakhs of tax deduction. Here’s a look at NPS tax benefits:

Note: When your employer is contributing to NPS, and you are also contributing to NPS – you can claim all the three deductions listed above to maximise your tax benefits under the old tax regime. However, under the new tax regime, a deduction u/s 80CCD(2) contribution made by the employer towards the NPS can be claimed.

Related Content: 
NPS Calculator 
Atal Pension Yojana Calculator 
Employer's Contribution to NPS in Taxable Salary