Deductions Under Section 80CCD of Income Tax

Paying your income tax in an accurate and timely manner is crucial for the country's economic growth. 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,1961 that allow you deductions against investments in specific avenues. One such popular option is deduction under Section 80CCD.

Budget 2024 - Increase in Deduction on Employer's Contribution to Pension Scheme

As per the proposed change in Finance Bill, 2024, the deduction against employer's contribution to pension scheme (i.e. u/s 80CCD (2)) has been increased to 14% of Salary (plus dearness Allowance), for other employers from 10%. However, the benefit of this amendment has been made applicable only to the taxpayers who are opting for the new tax regimes under Section 115BAC.

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 towards the NPS also come under this section. 

Deductions Under 80CCD(1) and 80CCD(2)

Section 80CCD has been further divided into two subsections. 

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

Availability of Deductions under the New Tax Regime

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).

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 taxpayers for contributions made to NPS. It is irrespective of the fact whether the contribution has been made by a government employee, a 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 70 years. This also applies to NRIs. Following are the key provisions of Section 80CCD (1): 

Deduction limits:

1. Employees: The maximum deduction permissible for employees is 10% of their salary (basic + DA) in the previous year.
2. Self-Employed: The maximum deduction permissible for other individuals, such as self-employed individuals, is 20% of the gross total income in the previous year.

The maximum limit of deductions from under 80CCD(1) is capped at Rs 1.5 lakhs for a given financial year.

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.

80CCE(Combined limit) = 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)

Under Section 80CCD(2), deduction is available on employer's contribution to NPS. 
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.

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).  
Section 80CCD(2) allows a salaried individual to claim the following deduction:

1. Central Government or State Government Employer: Up to 14% of their salary (basic + DA)
2. Any other employer: 

• Under the old tax regime - Maximum deduction of 10% of salary (basic + DA) 
• Under the new tax regime - Maximum deduction of 14% of salary (basic + DA) (This 14% rate has been increased from 10% with effect from FY 2024-25) 

National Pension Scheme under 80CCD

The Central Government introduced NPS to provide the benefit of an organized pension scheme to Indian citizens. Initially, NPS was meant for government employees only but was later opened for the private sector and 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 70 years. While it is mandatory for Central Government employees, it is voluntary for other individuals.
• 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 3,000 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 of up to 25% of the contribution made by an individual, subject to certain conditions, are 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 investors after retirement. It is open to investment from 18 to 40 years, as it requires a 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 Rs 1,000 to Rs 5,000 per month on retirement. Some other features of APY are:

• Tax deductions up to Rs 1.5 lakhs are eligible under section 80CCD (1).
• Like NPS, an additional investment of up to Rs 50,000 is eligible for tax deduction under section 80CCD (1B).
• On the death of the investor, the spouse can receive payments.
• On the premature death of the investor before the age of 60 years, the spouse can withdraw the entire corpus or continue with the scheme.
• Self-employed individuals can claim a deduction of a maximum of Rs 1.5 lakhs for APY investments that are up to 20% of their annual income.

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 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. The deductions available under Section 80CCD can be claimed at the end of the financial year when you file your income tax returns. 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