Income Tax Deductions under Sec 80 CCD(1B)

Payment of income tax is essential for every citizen of India who has an income tax liability, as per the rules and regulations of the Income Tax Act 1961. But this does not mean that you have to pay tax on the entire income that you have earned in a given financial year. There are several provisions under the Income Tax Act that allow you to claim deductions against specified investments and expenses.

1. Plan your Taxes to Save your Income

By planning your taxes carefully, you can save a significant amount towards your taxation liabilities and create an additional source of income for yourself. With dual benefits of tax saving and income generation, these deductions offer you significant advantages. Government introduces new deductions or amendments from time to time that you must keep a close watch on. One such deduction that is available to you is Sec 80 CCD (1B) which pertains to the contributions made towards NPS.

2. About NPS

NPS or National Pension System is a pension scheme available for both government employees as well as private citizens. NPS is one of the most popular options available to individuals looking to create a corpus for their retirement along with a regular monthly income.

The money deposited in NPS is invested in a variety of securities and investment avenues including equity market. It is widely regarded as one of the cheapest investment options with exposure to equity.

As the returns are directly related to the market performance, there is no guarantee of any particular amount, but over a period of time, returns from NPS are one of the highest in the market.

3. The two types of NPS Accounts you should know of

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

(i) Tier 1 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 lakh 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).

(ii) Tier 2 Account

This is necessarily a voluntary savings account which allows the subscribers to make withdrawals as and when they like. But the contribution made to a Tier 2 account is not eligible for tax deduction. To open a Tier 2 account, you must open a Tier 1 account first.

Contribution to NPS now qualifies under the exempt-exempt-exempt (EEE) mode of taxation wherein the amount contributed to NPS, the income generated and the amount of maturity, are all tax-exempt. As per the latest guidelines, you can withdraw up to 60% of the amount on maturity and need to reinvest the remaining 40% to purchase an annuity that gives you a regular monthly income.

4. What is Sec 80CCD(1B)

Section 80CCD of the income tax act deals with deductions offered to individuals contributing to the NPS. As per Section 80CCD, until the year 2015, an individual was eligible to claim an income tax deduction of up to Rs. 1 lakh against contributions made to the NPS. In the budget for the year 2015, the government enhanced the maximum amount payable to the NPS to Rs. 1.50 lakh per annum. Additionally, a new sub-section 1B was also introduced, which offered an additional deduction of up to Rs. 50,000/-for contributions made by individual taxpayers towards the NPS.

The additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available to assess over and above the benefit of Rs. 1.50 Lakhs available as a deduction under Sec 80CCD(1). Thereby, raising the maximum limit of exemption to Rs. 2.00 Lakhs with Section 80CCD(1) + Section 80CCD(1B).

DID YOU KNOW?

Section 80C+ Section 80CCC+ Section 80CCD(1)

For instance, consider yourself as an individual who is making investments of Rs. 1,50,000/- under Section 80C (PPF, Tax Saver FD , ELSS etc). Now, you have decided to contribute Rs. 70,000/- per annum towards the NPS. You can now claim a deduction of Rs. 2.00 Lakhs, i.e. Rs. 1.50 Lakhs under Sec 80C and Rs. 50,000/- under Section 80CCD(1B).

5. The two types of NPS Accounts you should know of

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

(i) The additional deduction of Rs. 50,000/- is available only for contributions made to NPS Tier 1 accounts.

(ii) Tier 2 accounts are not eligible to claim the deduction under Section 80CCD(1B).

(iii) The deductions under Section 80CCD(1B) are available to salaried individuals as well as to self-employed individuals.

(iv) You need to produce documentary evidence of the transaction related to the contribution to NPS.

(v) Partial withdrawals are allowed under NPS but are subject to specific terms and conditions.

(vi) The total exemption limit under Section 80CCD(1B) is Rs. 50,000/- and is independent of exemptions under Sec 80 C. Thereby, you can claim a maximum deduction of  Rs. 2,00,000/-.

(vii) In case the assessee dies, and the nominee decides to close the NPS account, then the amount received by nominee is exempt from taxation.

(viii) If partial withdrawals are made from the account, then only 25% of the contribution made is exempt from taxation.

(ix) 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.

(x) The assessee can withdraw 60% of the entire amount on reaching the age of 60 years 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. Do keep in mind the points mentioned above, before taking any action related to your NPS account regarding Section 80CCD(1B).

6. Benefits for existing NPS subscribers

Existing NPS subscribers can also take the benefit of the deduction under section 80CCD(1B) in addition to deduction of Rs.1.5 lakh under Section 80C. They can claim an additional deduction of Rs.50,000 on their contribution under Section 80CCD(IB). 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: The contribution of the Central Government to NPS for its employees is increased to 14% with effect from 1 April 2019.

In case 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.