Deductions under Section 80CCD of Income Tax

Paying your income tax in an accurate and timely manner is crucial for the economic growth of the country. As a responsible citizen of India, you have to pay your taxes on time. The government has made several provisions in the Income Tax Act of 1961 that allow you deductions against investments in specific avenues. One such popular option is deductions under Section 80CCD.

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 the employers towards the NPS, also come under this section. NPS is a notified pension scheme from the Central Government.

National Pension Scheme under 80CCD

The Central Government introduced NPS to provide the benefit of an organized pension scheme toIndian citizens. Initially, NPS was meant for government employees only but was later opened for the private sector as well as for the self-employed individuals. The basic motive behind NPS is to help individuals create a retirement corpus and receive a fixed monthly payout to help them lead a comfortable life post-retirement.

Here are some of the major highlights of the NPS:  

• One must contribute to NPS until the age of 65 years. While it is mandatory for employees of Central Government, for other individuals it is voluntary.
• To be eligible for Income Tax deduction under the NPS Tier 1 Account, one must contribute a minimum of Rs 6,000 per annum or Rs 500 per month.
• To be eligible for Income Tax deduction under the NPS Tier 2 Account, one must contribute a minimum of Rs 2,000 per annum or Rs 250 per month.
• There is an option to choose from various investment options like Equity funds, Government bonds, Government securities, etc.
• Partial withdrawals up to 25% of the contribution made by an individual, subject to certain conditions, is allowed.
• Individuals can withdraw up to 60% of the corpus as a lump-sum payout and have to invest the remaining 40% in an annuity plan.
• It is one of the cheapest equity-linked investment options in the market.

Atal Pension Yojana (APY) Under 80CCD

APY or Pradhan Mantri Pension Yojana is a retirement oriented government scheme that guarantees a minimum pension payment to the investors after their retirement. It is open to investment from the age of 18 to 40 years, as it requires minimum period of 20 years before payments start at the age of 60 years. Premature withdrawals are also permitted in certain cases, but the investor chooses a pension amount ranging from 1000 to 5000 per month on retirement. Some other features of APY are:

• Eligible for tax deductions up to 1,50,000 under section 80CCD(1)
• Like NPS, additional investment of up to 50,000 is eligible for tax deduction under section 80CCD(1b)
• On death of investor, spouse can receive payments
• On premature death of investor before the age of 60 years, spouse can withdraw entire corpus or continue with the scheme
• Self employed individuals can claim deduction of maximum 1,50,000 for APY Investments that are up to 20% of their annual income

Categorizing 80CCD

Section 80CCD has been further divided into two subsections to provide clarity regarding the available deductions for income tax assesses.

While one subsection deals with the rules about tax deductions available to salaried and self-employed professionals, the other pertains to contributions made by the employer towards NPS.

Following is detailed information regarding the two sections for Section 80CCD.

Section 80CCD (1)

This subsection defines the rules related to income tax deduction available to individuals for contributions made to the NPS. It is irrespective of the fact whether the contribution has been made by a government employee, private employee or a self-employed individual. The provisions of this section apply to all Indian citizens who are contributing to the NPS and are between the age of 18 to 65 years. This also applies to NRIs. Following are the key provisions of Section 80CCD(1): 

1. The maximum deduction permissible under this section is 10% of the salary (basic + DA) or 10% of the gross income of the individual.
2. From FY 2017-18, this limit has been increased for the self-employed individuals to 20% of the gross total income with the maximum limit being capped at Rs 1,50,000/- for a given financial year.

A new amendment to the Section 80CCD has been introduced in the Union budget of the year 2015 as sub-section(1B). Under these new provisions, individuals can claim an additional deduction of Rs. 50,000/-. This is available to both salaried as well as self-employed individuals.

This has thereby raised the maximum deduction available under Section 80CCD to Rs. 2,00,000/-. Tax benefits under Section 80CCD(1B) can be claimed over and above the deductions available under Section 80CCD(1).

Section 80CCD (2)

The provisions under Section 80 CCD (2) come into effect when an employer is contributing to the NPS of an employee. The contributions towards NPS can be made by an employer in addition to those made towards PPF and EPF. The contribution made by the employer can be equal to or higher than the contribution of the employee.

This section 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 80 CCD (1). Section 80CCD (2) allows salaried individuals to claim deductions up to 10% of their salary which includes the basic pay and dearness allowance or is equal to the contributions made by the employer towards the NPS.

Terms and conditions for deductions under Section 80CCD

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

• Deductions under Section 80CCD are available to salary as well as self-employed individuals. While it is mandatory for government employees, for other individuals, it is voluntary.
• The maximum limit of deduction available under Section 80 CCD is Rs 2 lakhs; this includes the additional deduction of Rs 50,000/- available under sub-section 1B.
• Tax benefits availed under Section 80CCD cannot be claimed again under Section 80C, i.e. the combined deduction under Section 80C and 80 CCD cannot exceed Rs 2 lakhs.
• The money received from NPS as monthly payments or as surrendered accounts will be liable for taxation as per the applicable provisions.
• Any amount received from NPS, which is reinvested in the annuity plan is entirely exempt from taxation. The deductions available under Section 80CCD can be claimed at the end of the financial year when you are filing your income tax returns. You will be required to produce a proof of payment to be eligible for this deduction. 

Illustrations

Illustration I

Mr N is a central government employee and he contributes Rs 70,000 to 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 unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000).

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.

Illustration II

Mr L is a central government employee and total contribution to NPS account is Rs 70,000. 50% of it is contributed by him, i.e. Rs 40,000 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 unexhausted limit of Section 80C of Rs 70,000 (Rs 1,50,000 – Rs 80,000).

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

Frequently Asked Questions

What is section 80CCD(1B)?

Section 80CCD(1B) specifically deals with contributions made by an individual (employee or self employed) to pension schemes as notified by the central government. This section provides additional deduction of Rs 50,000 over and above 80C limit of Rs 1.5 lakh. Which mean an individual can claim total deduction of Rs 2 lakh by making investments in 80C and contribution for national pension scheme u/s 80CCD(1B)

What is the limit of deduction under section 80CCD for employer’s contribution to NPS account?

Employer’s contribution to NPS is allowed as deduction under section 80CCD(2) while computing total income of the employee. However, the amount of deduction cannot not exceed 14% of salary in case of central government employees and 10% in case of any other employee. There is no ceiling on the amount of deduction for employer’s contribution. And the deduction is available over and above the limit of Rs 1.5 lakh and Rs 50,000 under section 80CCD(1) and 80CCD(1B).

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