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

When you plan your taxes carefully, you can save a significant amount towards your tax liabilities and create an additional source of income for yourself. Several provisions under the Income Tax Act allow you to claim deductions against specified investments and expenses. One such deduction is Section 80 CCD (1B), which pertains to the contributions made towards NPS. NPS helps you save taxes and also create a retirement corpus.

What is Section 80CCD(1B)?

Section 80 CCD of the Income Tax Act provides deductions to individuals on the NPS contributions made by them and their employer (if applicable). Section 80 CCD(1) provides a  maximum deduction of Rs.1.50 lakh per annum paid to the NPS. 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 80 CCD(1B) is available over and above the benefit of Rs. 1.50 lakh deduction under Section 80 CCD(1). Thus, the maximum limit of exemption is Rs. 2.00 lakhs under Section 80 CCD(1) + Section 80 CCD(1B).

DID YOU KNOW?

The deduction under Section 80 CCD(1B) is independent of the deductions made under Section 80C + Section 80 CCC+ Section 80 CCD(1). Thus, the deduction can be claimed under Section 80C+ Section 80 CCC+ Section 80 CCD(1) up to Rs.1.5 lakhs +  Rs. 50,000/- under Section 80CCD (1B). 

For instance, consider you are 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).

About NPS

NPS, or National Pension System, is a pension scheme available for government employees and private citizens. 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, but over a period of time, returns from NPS are one of 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: 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 80 CCD(1) and Section 80 CCD(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 80 CCD(1) and Rs. 50,000/- under Section 80 CCD(1B).
• Tier 2 Account: This is 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 a 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.

Eligibility under Section 80 CCD(1B)

The following individuals can open NPS:

• Resident individuals between 18-60 years  
• Non-Resident Indians (NRIs) aged between 18-60 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:

• 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 80 CCD(1B)
• The deductions under Section 80 CCD(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 80 CCD(1B) is Rs. 50,000/- and is independent of exemptions under Section 80 C. 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 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 80 CCD(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 above points mentioned above taking any action related to your NPS account regarding Section 80 CCD(1B).

Benefits for existing NPS subscribers under Section 80CCD

Existing NPS subscribers can take the benefit of the deduction under section 80 CCD for their NPS contributions. 

Section 80 CCD(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 80 C and 80 CCD(1) cannot exceed Rs.1.50 lakhs in the previous year.

Section 80 CCD (1B) gives an additional deduction of Rs.50,000 on their NPS contributions.

Section 80 CCD(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 80 CCD(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.

Frequently Asked Questions (FAQs)

Is the National Pension Scheme regulated?

Yes, it is administered by the Pension Fund Regulatory and Development Authority (PFRDA) and also under the purview of the Central Government.

Can every person claim a deduction under Section 80CCD(1b)?

No, Hindu Undivided Family (HUFs), Persons of Indian Origin (PIO) and Overseas Citizens of India (OCI) cannot avail the benefit of this section.

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