Deductions Under Section 80CCD of Income Tax

Section 80CCD allows tax deduction up to Rs. 2 lakh under the old tax regime on contributions to NPS and Atal Pension Scheme. Taxpayers can claim a deduction of up to Rs. 1.5 lakh under section 80CCD(1) and an additional Rs. 50,000 under section 80CCD(1B), making the total available deduction limit of Rs. 2 lakh. The employer contribution to NPS is allowed as a deduction under Section 80CCD(2). 

What is Section 80CCD?

Section 80CCD relates to tax deduction for contributions made to NPS and Atal Pension Scheme. Under this section, taxpayers can claim a total deduction of Rs. 2 lakh apart from the employer's NPS contribution, which is also allowed as a deduction under section 80CCD(2). Taxpayers can claim Rs. 1.5 lakh under Section 80CCD(1) and an additional Rs. 50,000 under Section 80CCD(1B). 

The deduction available under Section 80CCD is as follows:

• Section 80CCD(1): Deduction for employee or self-contributions (salaried or self-employed), within the Rs. 1.5 lakh Section 80C limit.
• Section 80CCD(1B): Additional deduction of up to Rs. 50,000 for self or employee contributions, over and above the Section 80C limit.
• Section 80CCD(2): Deduction for employer contributions to NPS, up to 10% of basic salary (14% for central government employees), without being part of Section 80C.

NPS Deduction under the New Tax Regime

Section 80CCD(2) allows salaried individuals to claim a tax deduction on contributions made by their employer towards the National Pension System (NPS). This benefit is not available to self-employed individuals. Only section 80CCD(2) deduction is available under the new tax regime. The deduction limit is as follows:

NPS Deduction under the Old Tax Regime

Section 80CCD(1)

Section 80CCD(1) allows deduction of up to Rs. 1.5 lakhs for contributions to National Pension Scheme. 

Deduction limits

Section 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), 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)

Employer contribution towards NPS is also available as a deduction under the old tax regime with the following limits:

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. 

Illustration

Mr N is a central government employee, and the government 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

Employer's NPS Contribution - Rs 70,000  

Tax Deduction under the New Regime:

Now, he can claim under section 80CCD(2), i.e. lower of the following-  
a. NPS contribution- Rs 70,000  
b. 14% of basic and dearness allowance- Rs 42,000 
Rs. 42,000 can be claimed as a deduction under section 80CCD(2).

Tax Deduction under the Old Regime:

Now, he can claim under section 80CCD(2), i.e. lower of the following-  
a. NPS contribution- Rs 70,000  
b. 10% of basic and dearness allowance- Rs 30,000 
Rs. 30,000 can be claimed as a deduction under section 80CCD(1)

If he has deductions under section 80C, of Rs. 1,30,000 already, the total deductions - 80C plus 80CCD(1) comes to Rs.1,60,000, exceeding Rs. 1,50,000. At this point, the taxpayer can make use of section 80CCD(1B), and claim the excess Rs.10,000.