Deductions Under Section 80CCD of Income Tax

Section 80CCD allows tax deductions for contributions to the National Pension System (NPS) and Atal Pension Yojana. It is divided into three main sub sections - section 80CCD(1), 80CCD(1B) and 80CCD(2). Both the employer's contribution and assessee's own contribution can be claimed as a deduction under this section. 

Key Highlights

• 80CCD(1) - Deduction on own contribution to pension schemes - Up to Rs. 1.5 lakhs.
• 80CCD(1B) - Additional deduction on own contribution to pension schemes - Rs. 50,000.
• Section 80CCD(2) - Deduction on employer's contribution to pension schemes - Up to 14% of basic pay under new regime.

What is Section 80CCD?

Section 80CCD relates to tax deduction for contributions made to National Pension System, Unified Pension Scheme (UPS) and Atal Pension Scheme. For salaried class, both employer's contribution and assessee's own contribution can be claimed as deduction. As per the recent notification released by the government, all the tax benefits available to NPS is also made available to Unified Pension Scheme (UPS).

Eligibility for Section 80CCD

• Only individuals who are citizens of India are eligible to claim this deduction
• Even Non-Residents can claim deductions under section 80CCD.
• Both salaried taxpayers and self employed individuals opting for NPS can claim deduction
• Individuals aged between 18 to 70 years only can opt for NPS schemes. Therefore, taxpayers falling within the same age group can only claim deduction under this section.
• If you are opting Atal Pension Yojana, the age limit is restricted within 18 to 40 years.

Section 80CCD(1) and 80CCD(2)

Deduction under NPS can be broadly classified into two types and they are broadly dealt under section 80CCD as follows:

• Section 80CCD(1) - Taxpayer's own contribution to NPS
• Section 80CCD(2) - Employer's contribution to NPS

These provisions are explained below in detail.

Section 80CCD(1)

• Section 80CCD provides for deductions on taxpayer's own contribution to NPS. 
• Up to Rs. 1.5 lakhs of contributions can be claimed as a deduction under this section.
• This deduction is not available under the new tax regime. Only taxpayers opting for the old regime can claim this deduction.
• The deduction limits for section 80CCD (1) are as follows:

• It is to be noted that a combined threshold limit for section 80C, 80CCC, 80CCD(1) is fixed at Rs. 1.5 lakhs.

Section 80CCD(2)

• Section 80CCD(2) provides deduction for NPS contribution amount made by the employer.
• Since only employer's contribution is allowed under this section, self employed individuals cannot claim deductions u/s 80CCD(2).
• This deduction is available under both old regime and new regime.  
• The deduction limit is as follows:

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 1.5 lakh + Rs 50,000) .

Pension Schemes Covered under Section 80CCD

National Pension System

• National Pension System is a comprehensive pension scheme under Pension Fund Regulatory Authority of India. 
• There are two types of account under NPS - NPS Tier-I and Tier-II accounts.
• It is a return based scheme, with various fund managers, qualifying for tax deductions under the Income Tax Act.

Atal Pension Scheme

• The government launched Atal Pension Scheme to provide financial security to the vulnerable sections of the society.
• Indian citizens aged from 18 to 40 years can opt for Atal Pension Yojana.
• Minimum contribution depends on the age of the account holder. It starts from Rs. 42, for 18 year old account holders.

Unified Pension Scheme

• The Central Government launched Unified Pension Scheme in 2024, as an option under the National Pension Scheme.
• This scheme provides an guaranteed return, adjusting to inflation. Therefore, it addresses the returns uncertainties of NPS.
• The existing pension account holders have the option to convert to Unified Pension Scheme.

NPS Vatsalya

• NPS Vatsalya scheme aims at securing financial future of the child.
• While only minors can open this account, only the parents and guardians can operate the account.
• After the child reaches 18 years of age, the contributions made to this account can be partially withdrawn.

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.
• 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.

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

Step-by-Step Guide to claim Deductions u/s 80CCD

1. Keep the necessary documents handy. If you are an employee, form 16 contains the eligible deduction amount under this section. Keep other necessary details like PRAN number handy.
2. Check if the contribution amount as mentioned in Form 16 matches with your payslips. You can also cross verify against your NPS account transaction history.
3. While filing the return, make sure the deduction that you claim is backed by sufficient proofs, and all the required data related to deduction are submitted.

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.