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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.
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.
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.
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).
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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).
Here are some of the critical points about Section 80CCD(1B) that you should be aware of.
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:
|Deduction for employer contribution||80CCD(2)||10% of salary (no monetary limit)||Outside of 80C and 80CCD(1B) limits|
|Deduction for employee’s contribution||80CCD(1)||10% of salary, max up to Rs.1,50,000||Within Section 80C|
|Self contribution to NPS||80CCD(1B)||Rs.50,000||In addition to 80C and 80CCD(2)|
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.