Deductions Under Section 80CCD of Income Tax

The government has made several provisions in the Income-tax Act,1961 that allow you deductions against investments in specific avenues. One such popular option is deduction under section 80CCD. Section 80CCD provides additional benefits to employees who opt for investments in specified pension schemes. Deduction is allowed for contributions made by both employers and employees.

Budget 2025 Update

The same tax benefits available for NPS contributions under Section 80CCD(1B) will now apply to contributions made to NPS Vatsalya accounts, allowing Rs. 50,000 deduction under the old regime if you have invested in the NPS Vatsalya scheme

What is Section 80CCD?

Section 80CCD relates to the deductions available to individuals against contributions made to the National Pension Scheme (NPS) or the Atal Pension Yojana (APY). Contributions made by employers also come under this section. 

Following is detailed information regarding Section 80CCD.

Deductions Under 80CCD

Section 80CCD has been further divided into three subsections. 

• 80CCD(1): Contributions made by the employee/self (salaried or self-employed) to NPS.
• 80CCD(1B): Additional deduction on contribution made by employee/self (salaried or self-employed) to NPS.
• 80CCD(2): Contributions made by the employer towards NPS.

80CCD and New Tax Regime u/s 115BAC

As we know, under the new tax regime only selective exemptions and deductions can be claimed. Below is the analysis of the availability of deductions under 80CCD(1) and 80CCD(2).

Section 80CCD(1)

• This subsection defines the rules related to income tax deduction available to taxpayers for contributions made to NPS. 
•  This deduction is available only under old tax regime. 
• The provisions of this section apply to all Indian citizens who are contributing to the NPS and are between the age of 18 to 70 years. This also applies to NRIs. 

Deduction limits:

Additional Deduction u/s 80CCD(1B)

Section 80CCD(1B) provides an additional deduction of up to Rs 50,000 for contributions made to NPS over and above the deductions available under Section 80CCD(1), provided if they opt for the old tax regime.

• Maximum deduction under Sections 80C + 80CCC + 80CCD(1) is Rs 1.5 lakh
• Rs 50,000 under Section 80CCD(1B) is in addition to the overall limit of Rs 1.50 lakh 

Thus, the maximum deduction available under Section 80CCD is Rs 2 lakhs (Rs 1,50,000 + Rs 50,000) . 

Section 80CCD(2)

• Additional deduction is available for contribution made by employer, u/s 80CCD (2) of Income Tax Act. 
• Section 80CCD(2) applies to only salaried individuals and not to self-employed individuals. The deductions under this section can be availed over and above those of Section 80CCD(1).
  
• An employer can make contributions towards NPS in addition to those made towards PPF and EPF. 
• The contribution made by the employer can be equal to or higher than the employee's contribution.
• It is to be noted that the combined limit as specified above does not include 80CCD(2).
  Section 80CCD(2) allows a salaried individual to claim the following deduction:

80CCD(1), 80CCD(1B) and 80CCD(2) - A Comparative Analysis

Atal Pension Yojana v/s National Pension Scheme - An Analysis

The following table describes salient features of  Atal Pension Yojana (APY) and National Pension Scheme (NPS). 

Terms and Conditions for Deductions u/s 80CCD

Following are the various terms and conditions governing the deductions under Section 80CCD.

• Deductions under Section 80CCD is mandatory for government employees, for other individuals, it is voluntary.
• The maximum deduction limit available under Section 80CCD is Rs 2 lakhs; this includes the additional deduction of Rs 50,000 available under 80CCD(1B).
• Tax benefits availed under Section 80CCD cannot be claimed again under Section 80C, i.e. the combined deduction under Section 80C and 80CCD cannot exceed Rs 2 lakhs.
• The money received from NPS as monthly payments or surrendered accounts will be liable for taxation as per the applicable provisions.
• Any amount received from NPS reinvested in the annuity plan is entirely exempt from taxation. You will be required to produce proof of payment to be eligible for this deduction. 

Illustrations 

Illustration I

Mr N is a central government employee who contributes Rs 70,000 to the NPS account. His salary structure is as below:

Basic Salary – Rs 2,20,000 
Dearness allowance – Rs 80,000 
Other Allowances and Perquisites – Rs. 2,00,000 
Investments under section 80C – Rs. 80,000

Now, he can claim only Rs 30,000 under section 80CCD(1), i.e. lower of the following- 
a. NPS contribution- Rs 70,000 
b. 10% of basic and dearness allowance- Rs 30,000
Restricted to an unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000). Unclaimed contributions of Rs.40,000 (70,000 - 30,000) can be claimed under 80CCD(1B).

Suppose in the above example, if investments under Section 80C were Rs 1,30,000, then the deduction under Section 80CCD(1) will be restricted to the unexhausted limit of Section 80C, i.e. Rs 20,000 and unclaimed contributions of Rs.50,000 can be claimed under 80CCD(1B).

Illustration II

Mr L is a central government employee whose total contribution to the NPS account is Rs 70,000. He contributes 50% of it, i.e. Rs 35,000 and 50% is contributed by his employer. His salary structure is as below:

Basic Salary – Rs 2,20,000 
Dearness allowance – Rs 80,000 
Other Allowances and Perquisites – Rs. 2,00,000 
Investments under section 80C – Rs. 80,000

Now, he can claim Rs 30,000 under section 80CCD(1), i.e. lower of the following- 
a. NPS contribution by the employee, Mr L – Rs 35,000 
b. 10% of basic and dearness allowance- Rs 30,000 
Restricted to an unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000). Unclaimed contributions of Rs.5,000 (35,000 - 30,000) can be claimed under 80CCD(1B)..

However, he can also claim a deduction for the employer's contribution to the NPS account. NPS contribution by the employer is Rs 35,000. The maximum deduction allowed for the employer's contribution is Rs 42,000 (14% of basic and dearness allowance). Hence, Mr L can claim an additional deduction of Rs 35,000 under Section 80CCD(2). There is no restriction of amount for deduction of the employer's contribution under Section 80CCD(2).

Related Content: 
NPS Calculator 
Atal Pension Yojana Calculator 
Employer's Contribution to NPS in Taxable Salary 
Deductions under Section 80CCD(1B) of Income Tax