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

Section 80CCD(1B) provides an additional deduction of ₹50,000 for contributions made by the taxpayer to the National Pension System (NPS), over and above the deductions available under Section 80C and 80CCD(1). This deduction is not available under the new regime u/s 115BAC.

When combined with the ₹1.5 lakh limit under Section 80C and 80CCD(1), the total maximum deduction available under Sections 80C, 80CCD(1), and 80CCD(1B) amounts to ₹2 lakh.

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 only under the old regime).

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

Example

• Say you invest Rs. 1.5 lakh under Section 80C (PPF, Tax Saver FD, etc.).
• You also contribute Rs. 50,000 annually towards NPS.
• You can claim a total deduction of Rs. 2 lakhs.

Deduction under Section 80CCD

• Existing NPS subscribers can also 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.
• 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 14% of salary made by the employer. This is not counted for Rs. 2 lakhs ceiling limit calculation
• 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 presented in a tabular format:

Eligibility u/s 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. 
• Those who are below the age of 18 years can open NPS Vatsalya account and still reap the benefits of section 80CCD(1B).

Note: 

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

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.  As the returns are directly related to the market performance, there is no guarantee of any particular amount.
• It is widely regarded as one of the cheapest investment options with equity exposure. Still, over a period of time, returns from NPS 

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.

Things to Note while Claiming Deductions u/s 80CCD(1B)

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

• 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.
• Partial withdrawals are allowed under NPS but are subject to specific terms and conditions.
• 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.

Taxation on NPS Withdrawal

The following table describes the tax implications on withdrawals from NPS.

Final Word

This section offers significant deductions for tax payers opting for old regime, by allowing additional Rs. 50,000 deductions for contributions made to NPS Tier-I account. It is important to assess the most appropriate regime for the tax payer and then plan the investments so that maximum benefits can be reaped with retaining disposable income at hand. 

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